Diamond Offshore Drilling's (DO) CEO Marc Gerard Rex Edwards on Q2 2014 Results - Earnings Call Transcript

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 |  About: Diamond Offshore Drilling Inc. (DO)
by: SA Transcripts

Diamond Offshore Drilling (NYSE:DO)

Q2 2014 Earnings Call

July 24, 2014 9:00 am ET

Executives

Darren Daugherty - Director of Investor Relations

Marc Gerard Rex Edwards - Chief Executive Officer, President, Director and Member of Executive Committee

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

Analysts

Ian Macpherson - Simmons & Company International, Research Division

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

David Wilson - Howard Weil Incorporated, Research Division

David Smith

Anders Bergland - RS Platou Markets AS, Research Division

Harry Mateer - Barclays Capital, Research Division

John Booth Lowe - Cowen and Company, LLC, Research Division

Operator

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead, sir.

Darren Daugherty

Thank you, Maria. Good morning, everyone, and thank you for joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; Ron Woll, Senior Vice President and Chief Commercial Officer; and Kane Liddelow, Vice President of Contracts and Marketing.

Following our prepared remarks this morning, we will have a question-and-answer session. Before we begin our remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, which are inherently subject to a variety of risks and uncertainties. Actual results achieved by the company may differ materially from projections made in any forward-looking statements. Forward-looking statements may include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates the drilling rigs will enter service, as well as management's plans and objectives for the future. A discussion of the risk factors that could impact these areas in the company's overall business and financial performance can be found in the company's 10-K and 10-Q filings with the SEC. Given these factors, investors and analysts should not place undue reliance on forward-looking statements. Forward-looking statements reflects circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise forward-looking statements.

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

Marc Gerard Rex Edwards

Thank you, Darren. Good morning, everyone, and welcome to our second quarter 2014 earnings conference call. During last quarter's call, I outlined 3 main value drivers. They will be my focus, moving forward. So as a quick reminder, the first of these is investment excellence, which is a long-term goal, and over the next several quarters, we will continue developing our strategy for asset optimization and capital allocation. The second is commercial excellence, which is centered around customer relationships, pricing, utilization and fleet positioning. A prerequisite for achieving commercial excellence is of course, assembling the right team. And I'm confident that with the recent appointment of Ron Wall, as Senior Vice President and Chief Commercial Officer, we are progressing in the right direction. Ron will have oversight of company marketing and contract acquisition activities, and his extensive experience will be an important addition to an already strong marketing team. And the third is operational excellence, whereby we operate safely, minimize downtime, and maintain discipline in operating expense and SG&A.

So I've been here a full quarter now. The initial impressions I shared with you on the last call have only been reinforced, as I continue to visit our rigs offshore, and meet our customers and employees around the world. Diamond is a proven performer with a solid track record. That continues to be a lot of market commentary around the edge of our fleet, but not enough around the quality. In Q2, our entire fleet experienced only 53 days of unplanned downtime. This is the best quarterly reliability figure we have delivered in more than 7 years. And it is a testament to the hard-working people we have here at Diamond Offshore. I like to refer to this as the Diamond difference, it is tangible, and many of our clients understand it.

Let me now turn to the results for the second quarter. We posted earnings per share of $0.65, which included a few nonrecurring items, highlighted in this morning's press release. 2 favorable items were firstly the receipt of a payment from Niko Resources related to our settlement agreement reached last year. And secondly, the sale of the cold stacked jack-up rig, the Ocean Spartan. A nonrecurring item that had a significant negative impact on results for the quarter was the termination of the Ocean Vanguard contract by Statoil. As its basis, the canceling the contract, Statoil has claimed that the rig is not in compliance with certain customer-specific technical requirements. Even though the rig has a long history of successful performance in Norway. Diamond Offshore believes that our customer had no basis to terminate the relationship under the terms of the contract, and we intend to defend the company's best interests in this regard. We have positioned the Ocean Vanguard at a stat location in the U.K., and while she is a capable rig, we are unlikely to find immediate opportunities, given that we did not have sufficient advance notice to market this rig. In all likelihood, we expect the rig to remain idle over the winter season. But we believe we have opportunities to work it as we move into 2015. Elsewhere in the North Sea, the Ocean Patriot is surely to arrive in the U.K., after it's upgrade and mobilization from Southeast Asia, whereupon it will be ready to begin a 3-year contract working for Shell, commencing in Q4.

Last night, we announced, in the rig status report, that we signed the Ocean Princess to a 1 well job at a rate of $230,000 per day, which was lower than some were expecting. Certainly, this is an aggressive rate in order to keep the rig working but I would not necessarily view this as a new benchmark day rate. Given that this contract will extend into the winter months, we were comfortable securing an extension with our customer, Enquest, for some short-term work albeit at a reduced rate. Additionally, we continue to explore opportunities for the Ocean Valiant in the North Sea market, including West of Shetlands. After completing equipment upgrades currently ongoing in the Canary Islands, we are optimistic we can put this rig to work during 2015. You may have noticed the theme here for the North Sea. After a harsh winter last year, in which operators experienced significant downtime while waiting on weather, we have seen some reluctance to sign rigs over the upcoming winter months. The result is that we are seeing an element of seasonality in the North Sea, which is pressuring rigs in this market with near-term availability.

The bigger news, with respect our fleet, is that we have negotiated with our customer, Murphy, a $550,000 per day contract that enables the Rhino to take outstanding backlog, with the added option to convert the contract into a multiyear term at a rate of either $485,000 per day for 3 years, or $500,000 for 2. The backlog was originally with the Ocean Confidence, which has recently entered the shipyard to undergo a special survey, along with maintenance and equipment upgrades.

By moving the term for the BlackRhino, we have pulled revenue forward in 2015, while gaining time to pursue opportunities that are aligned with completion of the upgrades, to the Ocean Confidence.

So let me now say a few words regarding Brazil. We have been in discussions with Petrobras regarding contract extensions on the ultra-deepwater semis, the Courage, Valor and the Baroness. We have concluded the pricing negotiations and we are close to being able to announce these. However, we are still waiting final approval from the relevant stakeholder. And when ready, we will announce these contracts accordingly in our Rig Status Report. Which brings me to the mid-water market in general, it is challenging, although opportunities for good returns continue to exist. During Q2, we secured a 3-year term for the Ocean Lexington, an SS-2000 rig that is one of the more mature assets in our fleet. This picture illustrates that well maintained second-generation units can remain marketable. Mid-water rigs are generally cheaper to operate than the higher spec units, and well-maintained units can exhibit less downtime. On the back of possible oversupply of ultra-deepwater rigs, bifurcation of the market will occur, as the high generation rigs compete down. However, not all markets require the same technology and good returns can still be generated at a price point below that of the 6 generation assets. Nonetheless, as we focus on capital allocation and asset optimization, we will see some of our low end mid-water units retired, while we progress through 2015. This will not be unique to Diamond Offshore, but will also happen across the industry. This should not be news to anyone, and is already factored into current valuations. However, mid-water rigs will continue to play an important role in our client's operational portfolios for a while to come.

So stepping up to the offshore semi and drillship market general, well, we cannot predict where future day rates are headed. But we feel the market is likely to have oversupply of rigs throughout 2015 and into 2016. As I mentioned on the last call, we have had a warm wind on our backs over the past few years, but choppy waters do lie ahead for the short term. We all understand the challenges facing our clients with regard to their immediate needs to address shareholder returns and reigning expenditures. We believe, these will be short-term drivers and our clients will ultimately have to return to prioritizing production and reserve replacement as project economics benefit from the correction in supply chain costs moving forward. Geopolitical issues aside, any market recovery, for offshore drillers, will likely be drawn out. Either way, we believe Diamond Offshore's credit rating and balance sheet give us the right tools with which to navigate through this particular ebb in the cycle and uniquely benefit from the opportunities this then presents.

I have some closing remarks, but first, I will hand the call over to Gary, to discuss our results in greater detail.

Gary T. Krenek

Thanks, Mark. As always, I'll give a little color on this past quarter's results and then cover what's to be expected for the upcoming quarter in the remainder of 2014. For the quarter just ended, we reported after-tax net income of $89.7 million or $0.65 per share, based on contract drilling revenues of $650 million. This is a decrease in EPS from $1.05 in the first quarter, which was driven by both the decrease in contract drilling revenues and an increase in contract drilling expenses. As Mark mentioned, revenues were negatively affected by the cancellation of the Ocean Vanguard contract in Norway, as the rig recognized only 39 days of revenue during Q2. Revenues were also negatively impacted by both the delay in the Ocean BlackHawk, which reported only 17 days of revenue in Q2 and additional downtime for surveys incurred for the Ocean Yatzy and the Ocean Alliance in quarter. The Yatzy was down for 41 days as its survey was moved forward into Q2 after being projected to be down in Q3. Alliance was down 81 days for its survey during the quarter, which due to weather and shipyard delays, was 30 days longer than anticipated. Both rigs however completed their surveys during the quarter and were back on contract as Q3 started. These negative items were partially offset by $15 million proceeds received from Niko Resources, related primarily to the cancellation of the Ocean Monarch contract last year. These proceeds were recorded as contract drilling revenue in the second quarter.

Contract drilling expense increased over last quarter by $26 million to $395 million. The increase was due primarily to additional survey cost incurred, plus normal operating cost to rigs that begin working in Q2, specifically the BlackHawk here in the U.S. for Anadarko, and the Ocean Ambassador, which began its 2-year contract for Pemex in Mexico. While increasing over last quarter, Q2's contract drilling expense was below our guidance of $405 million to $425 million. This favorable variance was primarily due to cost savings from rigs that did not work during the quarter, specifically the Ocean Valiant and Monarch. While these rigs continue to be marketed during the second quarter, we successfully instituted measures to reduce cost as much as possible, while still keeping the rigs ready to work on short notice. The delay in recognizing cost on the BlackHawk also contributed to the favorable expense variance. The remaining favorable variance can best be attributed to our ongoing efforts to control cost, which is always after safety, remains one of our top priorities.

Turning now to a couple of other line items on the income statement. Our Q2 results included an $8 million gain on the sale of Ocean Spartan jack-up, which has been cold stacked in the Gulf of Mexico since 2010. Our tax rate for second quarter was 20.3%, which was slightly below our guidance from 22% to 25%. The lower rate resulted from changes to our estimates in the geographies and various foreign tax rates where we earn our pretax income. As a result of these changes, we are now forecasting a tax rate of 20% to 24%, for the remaining 2 quarters of 2014.

Now for a look at some of the items that will affect our financial performance in the coming quarter. As always, downtime for surveys and shipyard projects will affect not only revenue numbers, but also contract drilling costs. In Q3, we expect the Ocean Valor and the Ocean Concord to incur downtime and additional cost related to their 5-year surveys. In addition to foregoing revenue during the shipyard stay, these surveys will add approximately $15 million to $20 million to our normal operating expenses. We have 2 other rigs however, which will have their operating expenses capitalized and deferred in the third quarter, thereby reducing normally recognized cost. These rigs were the Ocean Confidence, which as previously forecasted, will continue in the shipyard undergoing a service life extension, and the Ocean Patriot, which continues its shipyard upgrade in mobe for its 3-year contract with Shell in the North Sea. While this accounting treatment reduces normal operating costs for Q3, both of these rigs also have their cost deferred in Q2. So there'll be no quarter-over-quarter change in expected cost for these 2 rigs. For the exact number of down days expected in the third quarter, and the timing of these projects, I will refer you to our Rig Status Report that we filed last night. Offsetting these decreases in contract drilling expense, we have several items, which will increase cost in the third quarter. First, will be the operating cost for our new drill ship, the Ocean BlackHawk, which operated for only the final portion of Q2 but will incur a full quarter's worth of cost in Q3. The Ocean Endeavor, which previously have been deferring operating costs, while it's prepared for its 18-month contract in the Black Sea with Exxon, began that contract earlier this month, and will recognize a full quarter's worth of costs. The Ocean Clipper has moved to Columbia for a 90-day project with Petrobras and as a result we'll see an uplift in cost, which however will be offset by higher day rate as indicated in our Rig Status Report. The Ocean Monarch has returned to work in Southeast Asia in July for Total after being stacked with reduced cost since late last year. While all of these increase contracting expense, they'll also increase our top line revenue. And finally, we'll also recognize amortized mobilization and contract preparation expense, as related to various rigs in our fleet, which should total $16 million to $18 million in Q3. As a result of all these items, contract drilling expense should increase to between $410 million and $430 million in the third quarter, with cost associated with rigs returning to work being the largest driver for the increase. As always, I remind everyone that I've been talking about the line on our income statement contract drilling expenses. These numbers that I've just given you do not include cost incurred in the line reimbursable expenses. Reimbursable expenses, as always, whatever the amount incurred, will be offset almost dollar for dollar with additional reimbursable revenues. Depreciation expense for Q3 is expected to increase to $110 million to $115 million, with full year depreciation expense now expected to be between $445 million and $455 million. This is a little lower than our previous guidance and is driven primarily by the delivery delays from our drill ships. Interest expense should be in the $15 million to $20 million range in Q3 and G&A expansion, should be in the range of $18 million to $21 million per the quarter for the rest of the year. And as I previously stated, our tax rate for the final 2 quarters of the year is expected to fall between 20% and 24%. Our capital expenditure guidance again, remains unchanged from the last quarter. For 2014, we expect to incur $285 million of maintenance CapEx and $1.8 billion of new-build CapEx for a total of $2.1 billion. For 2015, we are still anticipating the capital expenditures to be approximately $800 million, primarily made up by the shipyard completion payment on the BlackLion, plus maintenance CapEx.

And with that, I'll turn it back over to Marc.

Marc Gerard Rex Edwards

Thank you, Gary. So in summary, we will continue to focus on the things we can control. Such as safety, the quality of our operations, managing costs and the efficient use of our capital. We firmly believe that Diamond Offshore is best positioned to weather a difficult market. And with the strongest balance sheet in our industry segment, we are looking to opportunistically position the company for growth so when the cycle inevitably turns.

And with that, we'll now take some questions.

Question-and-Answer Session

Operator

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

Ian Macpherson - Simmons & Company International, Research Division

Marc, I guess, the BlackRhino, for the Confidence situation kind of underscores the near-term replacement risk for some of the older ultra-deepwater rigs. And with that backdrop, can you give us some sense for how comfortable you are committing significant shipyard dollars to rig like the Confidence. And I guess also the Valiant, which you said has a decent bidding opportunity, West of Shetland but, in a way, putting -- spending a lot of money on those rigs in the yard is specular capital. So can you kind of frame the magnitude of that money and sort of what triggers you need to see from demand to spend more than might be outlaid at the beginning of those projects?

Marc Gerard Rex Edwards

Yes. Sure, Ian. Thanks for the question. Let me address the Murphy and the confidence, which for 1 of our ultra-deepwater drillships first. The -- we saw that as actually a good opportunity in this current market to do a couple of things. First of all, secure work for our third ultra-deepwater drillship. As you know already, the first 2 are already contracted at the rate of around $495,000 a day. This one pulls over revenue or backlog from the Confidence contract but critically, we add to that contract 2 options that were announced in the Rig Report last night. In other words, a 3-year option at just below $500,000 and a 2-year option at around $500,000 exactly. A couple of things on that, I know there's been some commentary overnight that people have been discounting that based on limited knowledge around the mobilization, there is a mobilization associated with that. And I think for the perspective of the models that the analyst run, you could probably put a typical mobilization cost in there at around 50% of what we would normally get in that kind of market. The rig itself, probably will end up working in the Gulf of Mexico. So a couple of things to that, we do know that the Gulf of Mexico has lower operating costs than other areas around the world. And then you can do with your own math around calculating that mobe fee accordingly. So that's somewhat of a positive. I also think that getting an extension or options to extend with Murphy is a very positive thing. Murphy, as you all know, is a very key client of Diamond Offshore. We have a very good relationship with them and the intent is to maintain that moving forward. As it relates to investing capital, on the other units, the Valiant itself has a great history in the North Sea. The Valiant is likely to go back up there, it can operate West of Shetlands, it's a very stable rig in that market, it can weather the issues that come on a seasonality basis. And we're typically looking at an upgrade that covers deck space, loading, mud pumps, et cetera, et cetera. So I don't want to go specifically into the details of how much that specifically will cost us. Again, you can draw your own conclusions. And the Confidence itself, I mean, that Confidence is a great rig. It has performed admirably around the world already. And we do feel that much that we've felt around the Onyx and the Apex, that the upgrade will actually be able us to position at, as a better rig moving forward. Now, around the timing of spending capital, I just like to put on the table that Diamond has a reputation of being somewhat countercyclical. We did purchase 2 rigs, a number of years ago, that operating today in Brazil, that when we purchase them at a discount in the market, were not immediately put to work. They were stacked for a while. And then if you look at it from a long-term perspective, the returns from those rigs themselves, have more than paid back that investment. So again, I just like, perhaps, to leave that on the table in suggesting that we will continue to opportunistically invest in our fleet, as the time requires, and we're looking at this from a long-term perspective. We're not looking at this on a quarter-by-quarter basis.

Ian Macpherson - Simmons & Company International, Research Division

That's good. Thank you very much for that color, Marc. Just going back to the mobilization on the Rhino, did you -- so -- do I understand correctly that the stated day rates on your fleet status are exclusive of in undisclosed mobe fee, which you will receive on top of those rates?

Marc Gerard Rex Edwards

That is correct. There's a mobe fee in there already but indeed, if we take it to a location that is further away than what the current contract suggests, then we have the ability to claw part of that mobilization back. And I think I already indicated perhaps what would be a good number for you guys to put into your models.

Operator

Our next question comes from the line of Klayton Kovac of Tudor, Pickering, and Holt.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So given the soft floater market, will we begin to see more contract structured similarly to the Rhino, which trades rate for term?

Marc Gerard Rex Edwards

I think that that can happen. What we're seeing in the market in general is a move to shorter-term contract terms. The -- If you look back a number of years when, obviously, the market was under supplied, our clients were keen to lock in and, obviously, take the pain of a high rate over a longer-term, not knowing where the market will be. I think those rates typically or terms were typically 3 to 5 years. I think now what you're going to see is typical terms, 2 to 3 years on those kind of contracts. And also, there will be somewhat of a transactional market that will appear where people contract on a well by well basis and put options on that. And I think you've seen an example of both of those during -- as we stated in our rig report last night.

Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. Thanks. And then just as a follow-up, what characteristics will you look for when deciding whether or not to retire a mid-water rig in 2015?

Marc Gerard Rex Edwards

You know, that's -- it's -- at this moment in time, we would look at stacking rigs on a case-by-case basis, if and when of course, rigs either get an extension or they do not. We would look to move a rig to another market, such as we are able to do when we put the Lexington to work. For example, on the term contract in Mexico, just staying on the Lexington for a minute, let's not forget the rigs, that this particular SS-2000 went up against. It went up against a fourth gen rig that was upgraded in 2009. This is a rig that is a workhorse and perhaps, 1 of our more mature assets in the fleet. But we have taken care of it and it secured work at a dayrate, which I think was somewhat of a surprise to the market but still nevertheless, provides very good return to our shareholders. And we won that work. So it's probably premature at this stage to, as we move into 2015, discuss the specifics of which rigs were likely to demobe, during the course of the next 12 to 18 months. But as I said in my prepared statement, we're already working on that. We do have a pretty clear idea as to what will be exiting the fleet, moving forward. I think it will be naive to suggest otherwise. The market is turning somewhat against us but we're still optimistic that some of those assets, that are being modeled out, I was going stack by some of the analyst will be able to maintain some element of work moving forward.

Operator

Your next question comes from the line of Gregory Lewis of Crédit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

Can we talk a little bit about the Onyx. As I think about that, and I realize it's not a big move down to Trinidad for that 4-month piece of work. But I guess, a couple of questions: 1 is, is there a mobe and demobe associated with that, with that stated day rate? And then my other question is, in thinking about moving the Onyx down to Trinidad, is there the opportunity or the expectation for additional work for that rig going forward? In Trinidad?

Marc Gerard Rex Edwards

Yes. In respect to the mobe and demobe, we'll be compensated for that on a lump sum basis. And part of the decision to take that job in Trinidad is that yes, we do see work behind it, the 1 well that PG has committed to.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, great. And then just 1 other question for me. In the press release for the mid-water fleet that there's a note talking about the exclusion of 22 revenue earning days, which were not recognized? And can you just provide a little bit of color behind that?

Marc Gerard Rex Edwards

In our press release?

Gregory Lewis - Crédit Suisse AG, Research Division

Yes. There's 22 revenue mid-water days that were excluded because of GAAP. It's in the bottom of the table, Note A.

Gary T. Krenek

That may have been associated with the Vanguard, we're going to have to look at that.

Operator

Our next question comes from Dave Wilson of Howard Weil.

David Wilson - Howard Weil Incorporated, Research Division

Just wanted to follow up a bit on the BlackRhino. Trying to reconcile everything and system implications. I know we talked about it, you said in your prepared remarks, and answered a couple of questions about it. But, just to be clear, that taking this contract with Murphy, with the BlackRhino, the implication there is that there was no other demand for new-build in this timeframe, that's my first question. And the second one, the contract with Murphy with the Confidence, did that preclude you from marketing the Confidence elsewhere, because it was under contractual obligation? It did seem like that one kept on getting pushed to the right a bit. And I was wondering if this is a way to free up the Confidence to market it?

Marc Gerard Rex Edwards

Yes. Dave, thanks for the question there. So there's nothing that prevents us from marketing the Confidence from now moving forward. Let me be clear on that. One of the other things of course, we've taken the backlog here over to the Murphy is -- sorry, over to the Rhino, is we're actually bringing revenues somewhat forward in 2015. So the confidence is gone into the shipyard in the Canary Isles. It is likely to come out at towards the end of Q1, beginning of Q2. And then obviously, it's going to be mobed to where it's going to work. The Rhino comes available before then, it is likely to go on contract, let's say around mid-Q1. So we're bringing revenue forward on that as well but otherwise would have been pushed into -- further out into 2015. So why did we do the switch? Well, we've secured the extra backlog of our -- it's not backlog as yet, but at least the options on a 2-year or a 3-year term, which might have been the case if we just stayed with the Confidence. The market is tight for ultra-drill -- ultra-deepwater drillships. Again, that's not news to anybody out there. There's probably less than a handful of real opportunities that exist in the market space right now that enable contracting of rigs where drilling takes place in 2015. Diamond Offshore is on the short, short list for a number of those opportunities, whether they are in Asia, whether they're in the Gulf of Mexico or whether they're in Latin America. Everyone knows the competition, for example, for a particular opportunity with an IOC offshore in Brazil. It's good that Diamond Offshore gets to the short, short list. It speaks to the Diamond difference that I spoke about earlier. Now, 1 other thing I just bring to the table from a point of caution, when people are looking at day rates, moving forward in this market space, and the commentary that comes around those, let's be cognizant of the actual costs associated with operating in different parts of the world and also, when it comes to places like Brazil, let's also be cognizant of the local content that is required on those contracts. So if I could just caution or counsel around commentary regarding where day rates are going, let's put a little bit more science into interpreting that, as it relates to the specific geographies in which we go. Now, having said that, there is pressure on day rates and there will continue to be pressure on day rates. As it relates to this particular space being mid to ultra-deepwater drilling, let's not escape the fact that we compete with Shell gas moving forward -- sorry, shale moving forward. And although we've had a boom here, in North America, and it begs the question, "Where would prices have gone if we hadn't have those boom in terms of offshore drilling?" But if we're looking at the energy demand, and I'm kind of taking this down apart, but it's perhaps not necessarily related to your question. But I want to point this out. If we look at the amount of additional competing hydrocarbon supply to the mid to ultra-deepwater space, moving forward. And the, let's say, the inability of international shale to come aboard. I mean, people are talking about maybe incremental over the next 3 years in terms of hydrocarbon shale of around 0.5 million barrels of oil per day coming from Canada, Russia or Argentina. But if you wind this, out over the next few years, the incremental energy demand has to come from mid to deep oil supply, has to come from mid to ultra-deepwater space. So we do see this as somewhat of a short-term ebb in the cycle. And if you suppose our energy demand is going up by, let's say 1 million -- just over 1 million barrels of oil per day, much of that supply, over the next few years, is actually going to have to come from this space. As the economics change, as pricing normalizes and this is why I'm talking about this, we will see projects that have been pushed over the horizon come back into -- come back onto the horizon. I spoke about the block 32 deal in Angola that has now come back over the horizon, another project that people are now beginning to talk about of course is in the West of Australia, The Enquest project out there, people are now talking about that one coming back over the horizon. So we are going to see a floor in pricing in the next let's say, 12 to 18 months materialize, the big question is, is what is that floor going to be, and I -- we don't have that at this moment in time. And then from there, we should see as the supply of units gets taken up, we should then possibly see a recovery at some state. I spoke about new shakedown recovery in the past and our own opinions around that have not changed.

Operator

Our next question comes from the line of David Smith of Heikkinen Energy.

David Smith

I wanted to ask if deepwater supply continues to outgrow demand, do the conventionally more deepwater units have an advantage, because they have the option to pursue work in mid-water depths where operators would want to avoid working the dynamic reposition rigs.

Marc Gerard Rex Edwards

Well, again, a good question. The deepwater -- sorry, the mid-water space isn't going to go away. I mean if you could Brazil for example, we've done a lot of work modeling where Brazil is going for obvious reasons, Brazil is an important market for us. The -- if you look at the ultra-deepwater space in Brazil, yes, sure, it's going to triple over the next 5 years. You're going to be up around 44 ultra-deepwater units serving that market. The mid-water space itself is not crashing and won't disappear, it would still exist. And if you look at perhaps the North Sea, if you look at other places around the world, Mexico, et cetera, et cetera, it is cheaper to run a MODU unit than a DP unit. So that space is going to exist moving forward.

David Smith

I don't question the reliability of the mid-water space at all. I was wondering if the -- given the tolerance to new application for DP units as you start to go onto shallower depths. That presents an opportunity where you have an excess of deepwater supply overall. If there's MODU units, there's fortune rigs and then some higher spec MODU units, would have the option of, rather than being idle for long of time, taking mid-water jobs until the deep water demand starts to grow.

Marc Gerard Rex Edwards

Yes, that will happen. There will be some competing down from the 6.5, 6 generation rigs into the 5 and the 4 spaces. That is going to happen. And I just like to refer to a comment, that I put earlier on the table here. Yes, some of the, let's say, more mature assets in the fleet will have to be looked at, and that's something -- we will make the hard decisions around that. So in other words, yes, an element of that will take place. How much? It's hard to say at this moment in time.

David Smith

And a direct follow-up on that, I noticed that the 5-year survey downtime for the Yatzy was removed from the last week stats report. I was just hoping to ask what that survey cost was budgeted at, and whether that survey was being postponed until the contract is secured or if we should take that as a signal towards your retirement comments?

Marc Gerard Rex Edwards

No, that -- just because of timing of wells, we move that survey forward into Q2. And so that's been done, yes, we're projecting premobe [ph] to a cost about $5 million was actually a fairly one of our lesser amount surveys.

Operator

Our next question comes from the line of Anders Bergland of Platou Markets.

Anders Bergland - RS Platou Markets AS, Research Division

Could you say something about the demand side in the ultra-deepwater space, is it more or less activity today than we saw last quarter? Are there any private contracts out there at all, or are we going into entering some kind of a desert walk for the next 6 months before we see a market pick up again in first half of '16?

Marc Gerard Rex Edwards

Yes, Anders, good morning, thank you for that question. The -- There's a little bit more churn around -- or noise around contracting opportunities but if we say there was nothing in Q1, there's slightly more than that today, but it's certainly not what we've seen in the past years. And that goes back to my commentary around, many of our clients have a sophisticated supply chain, they know what's going on in the market. And by deferring opportunities in a market where the suggestion is pricing may continue to fall, with the arrival of, well, my 50 drillships between now and the end of next year. Many of them are holding back and there is a bottleneck of opportunities, but at some stage that will have to be uncorked and we'll see opportunities move forward. And in my prepared comments, I suggested that yes, sure, we understand that many of the clients are having to look at return of, well, shareholder returns right now, but we don't think that that's sustainable in any sense of the imagination. And as pricing comes down, these projects will come back on the horizon. Let me give some color around this. Let's take a project in Latin America or offshore, I see [ph] goes in there, let's say around 60% of the installed well cost makes up the project cost. So on the drillship it may be then equivalent to 30% of the total project cost. As we see rates coming down from $600,000 to, the suggestion is $450,000, then what kind of impact does that make on the total project economics? And I would suggest that it is material. So at some stage in the near future, the slack, the slack that's in the market will be taken up, the question is when. And I, perhaps, can't further comment on that than to suggest that it's probably going to be 2015, before we see a material change -- the beginning of 2015 before we see a material change in contracting opportunities for what's coming to the market. But as I mentioned earlier, we have board assets in the past, opportunistically, that we have not put straight away to work. But when the opportunities come and the market changes, we have been very successful in returning shareholder value through those investments. And as we see, the market kind of going through this ebb in the cycle, we look at that countercyclically and we say that that provides opportunities for companies that are positioned like us and there's not too many that are positioned like us as we go into this cycle.

Anders Bergland - RS Platou Markets AS, Research Division

Okay. So on that note, would you be looking at the harsh environment kind of units or would you prefer benign environment kind of units?

Marc Gerard Rex Edwards

Well, harsh environment is generally spoken about more typically in the jack-up space. But I know what you're talking about, the Arctic or other places like that. So you could argue that we've got another investment, you could call it a harsh environment semi, that we're building for BP, that's going to work in the Barents Sea, offshore Australia. And the -- so that is a harsh environment semi, if that's what you -- if that's what we want to label that rig as. But -- sorry, it's the Bight, not the Barents Sea, offshore Australia. But we will look at assets on a case-by-case basis, moving forward. We put in place the opportunity to bring to the market 5 effective new builds during the course of 2014, we've got another 1 coming in January 2015, which are high spec units. In terms of harsh environment, are we likely to go after the Arctic? It depends on the opportunity. And I think you're very familiar with our investment strategies in the past and we are optimistic, moving forward, that at some stage in the near future, we might be able to repeat those kind of cycles or the strategy that those -- the cycle we're moving into presents itself. So I can't necessarily say at this stage that we will target harsh environment at the expense of other opportunities. It's more of a case of what truly makes sense from a capital investment perspective and how then that translate to maximizing our shareholder returns.

Operator

Our next question comes from the line of Harry Mateer of Barclays.

Harry Mateer - Barclays Capital, Research Division

I was wondering if you can just walk us through any updated expectations you have for your liquidity and balance sheet management during the last couple of quarters. In particular, I know you have a maturity coming up in September of about $250 million. I think your intention previously was to pay that down, you certainty do have plenty of cash on the balance sheet, but in light of market conditions, are you thinking about maybe preserving that cash liquidity and refinance the matter putting that on your revolver or is your intention still to pay that down?

Marc Gerard Rex Edwards

We have that payment coming up at 1st of September, as you said. And you're also correct, we have a lot of options, we have right at $1.3 billion worth of cash on the balance sheet, along with our $1 billion worth of revolver. At the same time, we have a number of payments coming up on the last 3 drillships. We're going to keep our options open, we raised an additional $1 billion last fall and it will -- we'll keep our options open. Interest rates continue to remain low but we have a lot of cash available. So a lot will also depend on opportunities, as Marc has been talking about that come up in the future as to what we did.

Harry Mateer - Barclays Capital, Research Division

Okay, that's helpful and then, just in terms of liquidity, I mean, what's -- how much cash plus marketable securities do you like to keep on the balance sheet? I mean, is this the right level? Do we have a running the business with a lower amount?

Gary T. Krenek

We certainly could run the business with quite a bit lower amount. We've always kept a large amount on the balance sheet, not as much as we have now. But again as I said, we've got a lot of payments coming up. We have, as I pointed out in my opening remarks, $2.1 billion worth of CapEx this year, of which a lot of it is yet to be spent in the second half. So we will certainly run that cash balance down much lower but we've always remained a conservative, have been a conservative company. We will be, we want to be able to take advantage of opportunities as they come up. That's what we've done for the past 25 years and we'll continue to do so.

Operator

And ladies and gentlemen, we have time for one final question. Our final question will come from the line of J.B. Lowe of Cowen and Company.

John Booth Lowe - Cowen and Company, LLC, Research Division

I know you that we kind of touched on this earlier, but I just had a question on Brazil and, specifically, the mid-water market there and what you guys are seeing as potential to keep some of your older mid-water units down there. I know that Petrobras has been releasing some older mid-water units recently, I just wanted to see what your thoughts were on what their preferences going forward and what kind of opportunities you're seeing there? And if not Petrobras, then other opportunities in Brazil?

Marc Gerard Rex Edwards

Yes. There's -- I think it's, if I recall correctly, 111 blocks that are going to companies outside of Petrobras in Brazil, right now. There's going to be opportunities with Total, BG, BP, BHP, Premier, and those are just a number of the international companies, never mind local outfits that have blocks down there. So this just isn't a Petrobras story in Brazil, and it's something that we're looking at very, very closely. On the mid-water side, the majority of their production comes from mid-water today. And that space is going to need maintenance, it's going to need further drilling. But once again, it's -- it is a tough market down there. And there's a number of local players that we have to compete with. But Brasdril which is our entity down there, has been there for 43 years. We know the market, we've got a high local content, we are very well-respected by the players that are down there, not least the Senior Executives of Petrobras itself. And there's no reason to assume otherwise that Brasdril will have a great future in Brazil for the next 43 years as well. Having said that, it is a tight market, and Petrobras is short of cash, and the ISC's are not ready, at this moment in time, to start drilling, to start turning to the right, if that's the correct term. That will happen over the next year to 18 months. And really that gets back to the commentary around, yes, we are going into a period of uncertainty. It's -- we're not at the bottom of the cycle, just generally, in our space by any sense of the imagination, but this is a cyclical business and we understand it and we've been there before, we know how to manage through it and we know how to come out of it better than we went into it. So that's general commentary around Brazil but really also applies elsewhere in the world too. Okay. Well folks, thanks very much for your -- being online today and we will visit the next quarterly call. Thank you.

Operator

Thank you. This concludes today's Diamond Offshore Second Quarter 2014 Earnings Conference Call. You may now disconnect.

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