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Executives

Gary Krenek - Chief Financial Officer and Senior Vice President

Lyndol Dew - Senior Vice President of Worldwide Operations

Les Van Dyke - Director of Investor Relations

Analysts

Collin Gerry - Raymond James

Unknown Speaker

Ian Macpherson - Simmons & Company

Geoff Kieburtz - Weeden & Co. Research

Judson Bailey - Jefferies & Company, Inc.

Arun Jayaram - Crédit Suisse AG

Matthew Beeby - Global Hunter Securities, LLC

G. Scott Burk - Oppenheimer & Co. Inc.

John Lawrence - Morgan Keegan

David Wilson - Howard Weil Incorporated

Douglas Becker - BofA Merrill Lynch

Robin Shoemaker - Citigroup Inc

Scott Gruber - Bernstein Research

Daniel Boyd - Goldman Sachs Group Inc.

Diamond Offshore Drilling (DO) Q3 2010 Earnings Call October 21, 2010 10:00 AM ET

Operator

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

Les Van Dyke

Good morning. Thank you for joining us. Larry Dickerson, our President and Chief Executive Officer was called to Washington, D.C. at the last minute along with other industry representatives and won't be joining us today. However, with me on the call are Lyndol Dew, Senior Vice President of Worldwide Operations; Gary Krenek, Senior Vice President and Chief Financial Officer; and Bill Long, Senior Vice President and General Counsel.

Before we begin our 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 of 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 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 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 Lyndol

Lyndol Dew

Thank you, Les, and good morning, everyone. On behalf of Larry, I will address four topics prior to turning the call over Gary, the first of which is the moratorium in the U.S. Gulf of Mexico and its continuing impact on Diamond Offshore. As I'm sure you are all aware, the moratorium has been lifted. While we consider this a positive step in the right direction, it is just one step toward resumption of normal exploration and production drilling in the Gulf. Drilling cannot commence until our customers obtain permits.

It's all about the permits. If we look to shallow water permitting, where there was no moratorium as a guide, we believe that permitting process will be slow for the foreseeable future, especially for new deepwater oil wells. Since early June there have been only 15 new well permits issued for water depths less than 500 feet according to the BOEM website. The BOEM needs a clear roadmap and additional resources to process a approve the permits. We hope the U.S. government makes this a top priority and that approved permits will begin to appear sooner rather than later.

To update you as to the status of our remaining rigs in the Gulf, all three of our marketed floaters have had their BOPs independently certified in accordance with NTL 5 and that certification has been accepted by BOEM. Our two marketed jack-ups are presently in compliance and are working. Additionally, we are presently evaluating the impact of the interim final rules that were published in the Federal Register on October 14.

As reflected in our rigs status report, we have had several rig relocation since our last conference call. The Ocean Confidence, mobilized across the Atlantic to Congo for Murphy and commenced operations in mid-September. The Ocean Baroness completed Petrobras acceptance in early September and commence it's three-year contract in Brazil. The Ocean Endeavor, arrived in Egypt on October 18 and is completing formalities prior to moving onto its first location. And the Ocean Scepter is presently in Brazil awaiting contract commencement during the first week of December for OGX.

In general, our traditional market remains stable and looks good, with the exception of the U.S. Gulf of Mexico. This should come as no surprise if oil price is above $80 per barrel. We see that high-end jack-ups and floaters have a small amount of the pricing power and market bright spots include West Africa and the Mediterranean. With the exception of the Ocean Sovereign, all of our rigs with contract end dates before the middle of next year have good prospects for continuing work.

And finally, a short comment on the dividends. The dividends remain an important part of our philosophy of returning value to shareholders. As stated in our press release, the board has decided to declare a $12.05 regular and $0.75 special dividend, which is the same as last quarter. The board will continue implementing our policy of evaluating the use of cash on a quarterly basis.

With that, I now turn the call over to Gary to elaborate on the numbers.

Gary Krenek

Thanks, Lyndol, and good morning to everyone on the call. Earlier today, we reported net income for the third quarter of $198 million or $1.43 per share on contract drilling revenues of $749 million. Including in these results was a $32 million gain on the sale of the jack-up Ocean Shield that we have previously announced the close and recorded early in this current quarter. Overall, our earnings are down slightly from the previous quarter when we reported an EPS of $1.61. This reduction was driven mainly by decreased revenues related to items that we highlighted in the earnings release.

Looking now at some of the other specific line items on our Q3 income statement. Contract drilling expenses came in at $349 million, which is below our guidance of $380 million to $390 million that we gave in our last conference call. Approximately $12 million to $14 million of this variance are timing differences attributable to two things. First, the Ocean Spur and Ocean Winner survey-related costs which were not incurred in Q3 but will now stretch into the fourth quarter and second, the delayed start up of Valor and Baroness contracts in Brazil as we defer recognition of operating costs as per our policy and GAAP longer than what we had originally anticipated.

Costs were also some $9 million lower due to cost savings related to the cold stacking of the New Era and the Voyager in the Gulf of Mexico during Q3. The remaining $12 million to $15 million favorable variance is a result of our continuing efforts to control costs on an ongoing basis.

Our tax rate for Q3 came in at 33.5%, which is above our previous guidance of 29% to 31%. During the quarter, we booked tax adjustments of some $6 million related to provision adjustments and to the fine-tuning of our FIN 48 tax accrual. Without these adjustments, our tax rate would have come in at a little over 31%, only slightly higher than our previous guidance. The remaining line items in our income statement for the third quarter are relatively straightforward and are within our previous guidance for the quarter or comparable with prior-quarter results. If anyone has further questions concerning our third quarter results, I'll be happy to answer them in the Q&A portion of the call.

Looking forward to the fourth quarter, we again expect to incur a normal, daily contract drilling expenses for our working rigs as outlined earlier this year. With respect to recently cold stacked rigs, you can assume cost of $5,000 per day for cold stacked floaters and $2,000 for day for cold stacked jack-ups. These normal daily operating costs will be inflated slightly as the number of large expense projects were budgeted early in the year are not set to be completed in the fourth quarter, adding approximately $5 million to $10 million to our costs.

In addition, we'll spend some $4 million to $6 million to complete the surveys of the Spur and the Winner, which will be doing in the third quarter. We will also record in the upcoming quarter some $32 million in amortized mobe and contract prep cost that had previously been deferred, and we'll also record approximately the same amount of deferred mobilization revenue.

Adding that all up, they should result in expected contract drilling costs, excluding reimbursable costs of some $380 million to $390 million for the fourth quarter 2010. Now this is some $30 million to $40 million more than our third quarter contract drilling expenses. But remember, during Q3, we deferred costs due to mobing and/or acceptance testing for the Confidence, Baroness, Endeavor, Valor and the Scepter which we'll all be operating all or most of Q4.

Looking further down the P&L statement, DD&A, G&A and interest expense should all be relatively consistent quarter-over-quarter going into Q4. And with respect to our tax rate, we expect to see a rate of somewhere around 31% or 32% for the upcoming quarter. Our updated capital expenditure guidance is now for us to spend some $430 million for the full year of 2010 for maintenance CapEx, additional spare parts and required upgrades needed to comply with international contracts that we've been awarded. In addition to this maintenance capital amount, we expect to incur an additional $65 million to complete the commissioning and outfitting that occurs in the Valor, two new build rigs we acquired in the previous year. All told, this sums up to total CapEx for 2010 of some $495 million.

And finally, as always, I would refer you to our rigs status report, which can be found on our website for expected downtime for our rigs for the remainder of the year, for contract durations, timing of contract rollovers and other pertinent information.

And with that, we will open the Q&A portion of our call. Operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company

I really just wanted to ask Lyndol or Gary, if you wanted to comment on what you're seeing in terms of a budding strength and recovery in the deepwater market? And how you are assessing opportunities to acquire or build, as I know that's been in your flag in recent quarters as a priority. Where we stand with that? What are the options and the agenda for building deepwater fleet?

Gary Krenek

Well, looking at the deepwater market, there seems to have been a little bit more strength here recently in the last couple of months. We're certainly seeing opportunities throughout the world. As Lyndol said particularly West Africa, a number of the potential opportunities out there. And so that's looking good. With respect to adding to the fleet, we are always looking for opportunities to add to our fleet. This company was built through acquisitions in the past. And we will continue to monitor anything that comes up. There is a couple of potential opportunities. I'm sure, everybody knows about C Dragon rigs that are out there by Lloyd's, say the express public opinions of trying to divest themselves with those rigs, a couple of the Greek ship builders that have potential rigs that can be acquired. We'll continue to evaluate everything that comes down the pipe as we always have and along with potential new builds. We're monitoring the costs of new builds from the shipyards. As everyone knows, when we've added to the fleet in the past, we've done it economically and we'll continue to try to do so in the future.

Ian Macpherson - Simmons & Company

Is there a clear cut advantage between acquiring or building new at the shipyard at this stage based on...

Gary Krenek

There certainly is an advantage in acquiring and that these rigs are already either almost totally built or partially built. So early delivery would be the advantage on acquiring the rig. The question is, how much are you going to have to pay for that rig? And we said we'll continue to monitor that and we'll evaluate both of them as they come, as those opportunities come up.

Ian Macpherson - Simmons & Company

Gary, should we be watching Diamond to continue to prune the low end of the fleet as you have with some older jack-ups? And also with the Shield that you decided to part ways with to Ensco, is that still part of that strategy going forward?

Gary Krenek

Well, we certainly would like to upgrade our fleet by adding new equipment to it. We, of course, will evaluate our older equipment and decide what to do. The sale of the Shield, we weren't necessarily looking to sell that rig but we had an offer we felt we couldn't refuse. And we continuously evaluate our fleet on an ongoing basis.

Operator

Your next question comes from Dan Boyd of Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

You mentioned that all the rigs rolling off contract, it sounds like over the next six to 12 months is seen to have good prospects to stay working. We've seen a lot of bifurcation in the market where the ultra deepwater rigs have I think surprised to the upside. What are you seeing for the sort of lower specification rigs? Are the rates you're talking about kind of consistent with what we're seeing over the past three months? Or are the big better assets starting to pull rates up or towards the bifurcation and it cause rigs to maybe weaken?

Gary Krenek

I think the rates were fairly consistent over the past three months. Mid-water rates are in the low to mid-200s. Our most recent fixture was the Ocean General, found in Southeast Asia at 240. And so we're pretty much steady as she goes at this point.

Daniel Boyd - Goldman Sachs Group Inc.

And can you just give us an early flavor for what surveys look like in '11 and '12? I know they kind of -- every three or four years, I think you go through a cycle, who happen go through the bigger survey and downtime. Can you maybe compare '11 and '12 to what we saw in '09 and '10?

Gary Krenek

'11, right now, we're looking at eight different rigs undergoing surveys and we're in the process of doing our budget and evaluating how long we think those rigs are going to be out. '12 is going to be a heavy year. I don't have the figures in front of me, but because of the five-year cycle, well, '12 and '13, we will have an increased number of rigs that we're going to have to survey.

Daniel Boyd - Goldman Sachs Group Inc.

It sounds like next year is actually a pretty light year even relative to this year then?

Gary Krenek

Well, we had about the same number this year. I think we did seven or eight this year. So '11 will be about the same as '10. '12 and '13 will be our heavy years.

Operator

Your next question comes Collin Gerry of Raymond. James.

Collin Gerry - Raymond James

I wanted to follow up on kind of the upgrade in the fleet comment you had made. Does that include potential upgrades like shipyard upgrades to current rigs? And how does that fall into the new build versus acquire assets kind of line of question from earlier.

Gary Krenek

We have some potential rigs that we could upgrade to some point. But our major upgrade program of upgrading the Victory-class rigs is pretty much over. We've upgraded the rigs that we could upgrade. And so we have only two more Victory-class rigs left. The rest of our rigs, as any type of major upgrades, really does not make economic sense. Victor-class rigs were -- lent themselves very well to being upgraded. The rest of the fleet does not necessarily do that. You can always upgrade any rig, it just depends on how much many you're willing to spend. And some of the other type rigs, it's actually more economic to go ahead and start from scratch and build a new rig rather than try to upgrade something like the General or the Epoch or something like that.

Collin Gerry - Raymond James

So going forward, just really a handful of opportunities by and large, not much upgrade opportunity?

Gary Krenek

That's correct.

Collin Gerry - Raymond James

Switching gears real quick. On the Valor, we've seen the delivery pushed to the right a few times. Maybe just give us a sense of what's happening there?

Gary Krenek

Right now, we are in the last phases of Petrobras inspection and we expect that to happen relatively quickly. As you may or may not be aware, Petrobras has a very detailed requirements for the inspection process. And so we are departing our location and heading toward the actual location where we'll do our DP trials and then start from there.

Collin Gerry - Raymond James

I guess relative to say six months ago, what has changed in that delivery time table in terms of the inspection? Really just back-and-forth to just normal occurrence that you didn't see prior to that? Or is there any specific items that you can maybe mention that kind of delayed that delivery?

Gary Krenek

Probably the biggest issue that's caused an impact has been depth cylinder repairs. Those are direct acting tensioners and we had some unanticipated damage that required repair and that took a couple of months to get that done. Before we could recommence the actual Petrobras inspection. So that was the event.

Operator

Your next question comes from John Lawrence of Tudor, Pickering, Holt.

John Lawrence - Morgan Keegan

Could you talk about the strength of the North Sea in 2011 with a couple of rigs rolling?

Gary Krenek

We characterized the North Sea in balance right now. We have the Nomad, that is scheduled to come off contract here in the next month or two. And we were talking to customers right now. We hope to have something in place that will take us through the winter months. And then once we get into the spring, we see strength there to certainly be able to continue to work our rigs.

John Lawrence - Morgan Keegan

And then just, anything you could say on the Monarch litigation?

Gary Krenek

John, not much. We can't comment on all the specifics of the pending litigation but we can reiterate what's in our rigs status report, which essentially is our customer is taking a position a position at the moratorium constitutes an event, a force majeure event under the contract that gives them a right to terminate the contract. They have terminated the contract or given us notification of termination and then filed action in Houston seeking a declaratory judgment finding that they have a right or that their interpretation of the contract is correct. And Diamond's view is, obviously, to the contrary. We don't believe the event constitute a force majeure event and therefore don't give them a right to terminate the contract. So we're going to vigorously pursue that position.

Operator

Your next question comes from Dave Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated

And this is with regards to the tax rate longer-term. And I know you guys get this question a lot, but I think this is -- you got it when you have a lot more rigs in the Gulf of Mexico. What are your thoughts on the possibility of a re-domestication or some kind of inversion, something that will lower your tax rate permanently going forward now that you have a lot of the rigs out of the Gulf of Mexico?

Gary Krenek

Well, we have a very good tax department. I think that continuously looks at ways to reduce our tax rate. To specifically answer your question for an ongoing basis, that the true answers I don't know because we don't know what tax laws are going to be in future years. What I can tell you though is that we do actively pursue and have done things in the past to be able to lower our rate. And we will continuously do that. What that rate is going to be next year, I'm not sure right now. There is some tax legislation that we thought was going to be passed during this year that would have lowered our rates from four or five percentage points. Tax laws that expired at the end of 2009 were supposed to be renewed in 2010, and Congress never got around to doing it. But they're still potentially going to renew some of those tax laws. I know, Dave, I didn't really answer your question other than to say we have to wait and see. But I can guarantee you we will monitor everything and do whatever we can to bring that tax rate down.

David Wilson - Howard Weil Incorporated

Gary, maybe another way to ask it is, and it sounds like that's an ongoing thing that you've always done that, but moving rigs out of Gulf of Mexico hasn't changed kind of that approach or made it easier, anything like that?

Gary Krenek

Not necessarily. With rigs out of the Gulf, there are some things we can potentially do. We have our rigs both in the domestic and foreign structure. However, rigs that are working in international markets are not necessarily in the foreign structure. In order to move them into that foreign structure to benefit from lower tax rates often causes an upfront tax expense that makes it prohibited.

Operator

Your next question comes from Scott Gruber of Sanford Bernstein.

Scott Gruber - Bernstein Research

You have a five semis of varying capability working in Southeast Asia and Australia. There's potentially a lot of LNG connected to gas drilling in the region. Yet at the same time, there's a fair amount of stacker to deepwater capacity being extracted in the broader region as well. And as we've seen in the jack-up market, the speculative capacity has rollout without contracts since we've been dumped into the regional market to detriment of utilization across the regional fleet. Is there a risk of that occurring in the semi market as these speculative deepwater rigs rollout?

Gary Krenek

I guess, one of the barriers to entry especially in Australia is the safety case requirement. So it's not something that they can just immediately just dump the rig out of the shipyard and run it to Australia and make it work. And the rigs that are there, the legacy rigs they already have safety cases. So that gives them some time to continue working. But we view the Southeast Asia market as being reasonably stable and we're comfortable that our rigs there can continue doing a good job for our customers.

Operator

Your next question comes from Arun Jayaram of Credit Suisse.

Arun Jayaram - Crédit Suisse AG

A couple of clarification on your Gulf of Mexico fleet. Firstly, Gary, on the Ocean Victory where you restart with ATP, I believe in early November, is that work have a permit? Or could you just describe that program?

Gary Krenek

That is the continuation of the work that we had done previously. They also have some P&A work as I understand that we may be able to do for them. Exactly where they stand in that permit process, I am not sure other than the last I heard is that they still expect us to go to work for them in that first week of November.

Arun Jayaram - Crédit Suisse AG

But it sound like that they have a permit to perform those activities?

Gary Krenek

They either have their permit or they feel comfortable they are going to be able to get that permit by that first week of November, is my understanding.

Arun Jayaram - Crédit Suisse AG

And just second question on the Monarch, do you have the ability to market this rig to other customers given the situation on the contract on that rig?

Gary Krenek

Yes. And we are currently marketing that both in the U.S. Gulf and internationally.

Arun Jayaram - Crédit Suisse AG

And could you just comment on what you're seeing on the demand front for a rig of this specifications?

Gary Krenek

We have a couple of customers right now that are interested in the rig. And we're in discussions with them.

Arun Jayaram - Crédit Suisse AG

And would you gauge that more international demand or Gulf of Mexico?

Gary Krenek

Yes.

Operator

Your next question comes from Robin Shoemaker of Citigroup.

Robin Shoemaker - Citigroup Inc

Could you comment on how you see the jack-up market in Mexico, both short-term for your contracts that are expiring and the prospects for longer-term contracts in Mexico? And rigs that you have that are not currently there that might be available depending on how they come out with regard to the age restrictions?

Gary Krenek

I think we characterized certainly the Mexico market as being active. We are aware of at least four current a bit opportunities that are there. We anticipate two more, all of which have the age requirements on the jack-ups. But we've been hearing that on the go-forward basis, they may relax some of that requirement making some of our units available to go in there and compete for those. We also anticipate a bid to come out shortly for 1,000-foot floater, which we have some units that could fulfill that requirement. And we're hearing about a market inquiry for the Lacosh [ph] development. So we really foresee Mexico as an active place, a place where we want to be and we want to stay there.

Robin Shoemaker - Citigroup Inc

So the floater requirement is for a start date in 2011?

Gary Krenek

Correct. We understand May of 2011 start date.

Operator

Your next question comes from Scott Burk of Oppenheimer.

G. Scott Burk - Oppenheimer & Co. Inc.

I wanted to ask a couple of questions about some comments you had in the release, specifically you talked about anticipating most of your rigs being employed majority in the fourth quarter. Would that extend to a couple of rigs that you have correctly stacked and maybe DM, the Voyager, the New Era or the Bounty. Could those temps would be going back to work in the fourth quarter? Or you're just saying that the rigs ruling of contract will continue to work?

Gary Krenek

Most likely, those rigs will not return to work, the ones that you mentioned in the fourth quarter. The ones that we indicated in the press release were the ones that we're mobing and acceptance testing and in the shipyard for surveys. Those will be going back to work either have already gone to work at the end of the third quarter, beginning of the fourth quarter or will be going to work shortly.

G. Scott Burk - Oppenheimer & Co. Inc.

Question about the Confidence and the Endeavor, about the two rigs that you've moved out of the Gulf of Mexico earlier this year. Both of them got an extra month on their contracts. And is any implication that makes it more likely that they will stay in those international areas? Or do you expect that they'll eventually make their way back to the Gulf of Mexico?

Gary Krenek

Well, for the Confidence, it certainly will come back to the Gulf of Mexico because we still have current work with Murphy here in the U.S. Gulf. And when the situation clarifies in the Gulf and Murphy can get their permits, that rig will certainly be coming back to the Gulf to complete that contract. In the meantime, it's working internationally. We have additional customers interested in that rig, in West Africa that we're talking to. And we'll work that rig over there until it has to come back. As far as the Endeavor, it's clear to do whatever. So most likely, we'll stay international since it's already over there rather than mobing back. But it is certainly free to be marketed anywhere in the world.

Operator

Your next question comes from Geoff Kieburtz of Weeden.

Geoff Kieburtz - Weeden & Co. Research

Coming back to the Monarch for a moment. Just to clarify, you are recognizing revenue on that rig currently, correct?

Gary Krenek

We are not. We are billing, we believe that as Bill said earlier, that we are owe that money and we are invoicing it. However, accounting rules have dictated that we reserve that revenue. And so technically speaking, we booked the revenue turn the right around and reserve it. The net effect is you see no revenue in our income statement.

Geoff Kieburtz - Weeden & Co. Research

I understand your caution in regards to how quickly the floater market in the Gulf of Mexico might rebound. But as you see it today, what quarter would you say it's most likely that we'll see a rig go back to work in a drilling mode in over 500 feet of water?

Gary Krenek

How long is a piece of string. The government is -- as Lyndol said, it's all about the permits. And exactly when is the government going to begin permitting these wells so that we can go to work. We will work in the Gulf of Mexico again. The country needs the energy. It will happen. The timing is open to speculation at this point.

Geoff Kieburtz - Weeden & Co. Research

I want to try to rephrase a little bit, do you think there's any chance a rig would be active by the end of this year?

Gary Krenek

By the end of this year?

Geoff Kieburtz - Weeden & Co. Research

Yes.

Gary Krenek

Not real encouraged by the end of this year. We just haven't seen anything come up so far. I'm certainly not ruling it out. I'm much more optimistic that we will see something next year.

Operator

Your next question comes from Doug Becker of Bank of America-Merrill Lynch.

Douglas Becker - BofA Merrill Lynch

Lyndol, wanted to follow up on your comment on Ocean Sovereign. You specifically singled it out as not having good prospects for continuing work, is that like we'd be mobilized to a different market or what's the thought process there?

Lyndol Dew

Well, right now our present customers tell us that they have no further work for it and our customers that we contacted in the area don't have a term program for it. So we're evaluating what's the best use of the unit either mobilize it or to stack it or reduce costs or whatever. But right now, we don't have a clear path for the Sovereign for work and that's the reason I singled it out.

Douglas Becker - BofA Merrill Lynch

But the potential for it being stacked, would be low probability?

Lyndol Dew

Right now, we don't know. We're still talking to people.

Douglas Becker - BofA Merrill Lynch

And if you can look into your crystal ball and realize there's still a lot of uncertainty here but -- how many deepwater rigs, floating rigs do you think will be in the Gulf of Mexico when we reach this new normal? How many additional rigs do you think will actually lead the Gulf? Just trying to get a sense for how you think the intermediate term market looks outside of the permitting issues that are certainly the focus in the short-term?

Lyndol Dew

I say it depends when the permitting process comes up. These rigs are not going to sit idle in the Gulf forever. And in fact there is this loss of the majority of them. We've taken two out and a couple of it have left. And so it tells me that the oil company thinks that the permitting process is going to work itself out sooner than later. So there certainly because of no drilling for the past six months, there's pent-up demand. Oil companies running behind schedule. The lease explorations are running. The clock is ticking on them. So we have the potential for there to be an increase in demand in the Gulf of Mexico should everything work itself out.

Douglas Becker - BofA Merrill Lynch

And then just a quick thought question. We're seeing some of the contractors indicate interest or at least operators are indicating interest in some smaller drill ships, maybe a little more nimble. What's Diamond's view of those type of assets and something that would be considered down the road?

Gary Krenek

Well, we certainly consider everything and we've heard that, we've looked at it. We won't rule anything out. We'll continue to look at it. There's not a lot of cost savings to build these smaller ships. The same equipment are on these rigs. We're saving a little bit money on steel. You build a big one, it can do everything that the small one can do. The small one, not necessarily can do everything the big one can do. So I guess our preference would be to a larger one. But again I wouldn't rule anything out.

Operator

Your next question comes from Andrea Stanford [ph] of Carousel [ph].

Unidentified Analyst

I'm wondering about the cost and time it takes to get a semi back in drilling mode from a stack position such as the Ocean Bounty, which has been stacked since August 2009?

Lyndol Dew

Right now, going from a stacked mode to an operation mode depends on the amount of surveys that have to be done and how much actual repairs. If the special survey has to be done and you're looking at a minimum of 45 to 60 days to reactivate that particular unit. If the surveys are current, and all we have to do is fire up the equipment and exercise it and put it back to an operation, it can be certainly done in less than a month. But we do take particular care when we stacked the rigs to make sure that the equipment is preserved and ready to go back to work on a fairly quick notice. But it really depends on where it stands in its survey cycle and what has to be done from a regulatory perspective.

Gary Krenek

The only thing that I would add to that, it also depends on how long it's been sitting there cold stacked. Our semis have not been cold stacked for a very long period, so I agree with everything Lyndol said. But the longer they sit there, then the more time is needed to bring it back until working mode.

Unidentified Analyst

That's why I'm asking you because there are some rigs that will be probably stacked for a longer period here as some of the older ones maybe. So such as the Ocean Bounty which is in Malaysia, I think that came from Australia. So could you answer on the cost side, would that be $10, $20 or more to get it into position without the special survey?

Gary Krenek

Well, the Bounty does have a special survey required. So that is going to require a significant amount of capital to bring it back to service. And then, of course, when you look at that unit, what do you want it to be in the future? When you're in there for a special survey, do you want to take the opportunity to upgrade it and give it more credibility? All those questions have to be answered and it's really market-driven and what do the customers want.

Operator

Your next question comes Mike Raelish [ph] of Isiah Capital [ph].

Unknown Speaker

Thanks for taking a question from a shareholder. I have two questions, I was wondering if you can address the accounting for the Monarch. I think you talked about your booking revenue. Can you talk about the expense side? Do you also defer the expense on that?

Gary Krenek

No, we book that as incurred.

Unknown Speaker

And then secondly, there's been a lot of speculation on the demand from Brazil for deepwater units. I was wondering if you could just comment on, if you feel comfortable having more than 15 units in that market?

Gary Krenek

We recognized a number of rigs we have down there, and we'd like to spread around. However, having said that, both Petrobras and OGX are very good customers of ours down there. And as long there's demand for rigs from those customers, particularly if we can get term work from them, we are more than happy to continue to work for them. There's other companies down there that may require rigs in the future. And if so, we'll work from for them down in Brazil.

Operator

Your next question comes from Matt Beeby of Global Hunter Securities.

Matthew Beeby - Global Hunter Securities, LLC

I had a question about the U.S. shallow water market. Earlier this year, you all had, I think as many as four jack-ups working, and now there's two. I'm just curious if there's a timing as to when you might be able to bring some of those rigs back from cold stack? And is there demand there that you might see some of those rigs working?

Gary Krenek

Again, it's the permits. And that has caused us to stack some of our rigs. The cold stacked rigs, the mat slots, that's a very commodity market. And the odds of bringing them out at anytime in the near future are pretty slim. With natural gas prices where they're at, that's also a detriment to working jack-ups in the Gulf of Mexico. So time will tell. We need two things. We need higher gas prices and we need the permitting process to be able to put anymore rigs back to work.

Matthew Beeby - Global Hunter Securities, LLC

So it's maybe more likely that you see some of the mat rigs as a divestiture opportunity, longer-term?

Gary Krenek

Those mat rigs are such a small percentage of our fleet and have the potential earning power of less than 1% of the total overall fleet. So it's not something that we dwell on a lot. There's a number of mat slots out there. And again, as our rigs sit cold stacked along with others, the odds of them coming back to work anytime in the near future, I think are pretty slim.

Operator

And our final question comes from Judson Bailey of Jefferies.

Judson Bailey - Jefferies & Company, Inc.

Follow up on Brazil. It's been noted here a lot of talk about them coming to market with some requirements using existing capacity. Based on your conversations with them, has there been any talk about them also changing the specification requirements? In other words, maybe contemplating using some more units as opposed to BP units or higher spec units?

Gary Krenek

Well, there's both BP and a number of our moored units were working out there. And they just recently took the Baroness. We mobe the Baroness out of the Gulf of Mexico down there, which is a moored unit. So they're looking at both.

Judson Bailey - Jefferies & Company, Inc.

And then my follow up, a little different direction. My understanding is Statoil is looking at potentially awarding some contracts to support a new construction. Do you guys have any interest in participating in new build rigs that would be going to a place like Norway?

Gary Krenek

Again, we look at all opportunities. And it boils down to the economics. If we believe that it's economically viable, certainly, we will look at it and potentially, participate. If we don't think that we can make money, then we'll pass on it. So just a common sense answer there.

Thank you for everyone that joined us. And we look forward to talking to you again in the next quarter.

Operator

And ladies and gentlemen, that concludes the Diamond Offshore Drilling Third Quarter 2010 Results Conference Call. We appreciate your time. You may now disconnect.

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