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Diamond Offshore Drilling (NYSE:DO)

Q1 2011 Earnings Call

April 21, 2011 10:00 am ET

Executives

Gary Krenek - Chief Financial Officer and Senior Vice President

Morrison Plaisance - Vice President of Contracts & Marketing

Michael Acuff - Vice President of Contracts and Marketing

Les Van Dyke - Director of Investor Relations

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

Analysts

Janice Rudd - Pritchard Capital Partners, LLC

Ian Macpherson - Simmons & Company

Arun Jayaram - Crédit Suisse AG

Matthew Beeby - Global Hunter Securities, LLC

David Wilson - Howard Weil Incorporated

Joseph Triepke - Guggenheim Securities, LLC

Robin Shoemaker - Citigroup Inc

Douglas Becker - BofA Merrill Lynch

Daniel Boyd - Goldman Sachs Group Inc.

Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling First Quarter 2011 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. 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; Moe Plaisance Vice President, Marketing; and Michael Acuff, Vice President of Marketing.

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 publicly update any forward looking statements to reflect any changes 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 we can open the floor to as many people as possible. With that, I'll turn the meeting over to Larry.

Lawrence Dickerson

Thank you, and good morning, as well. We were very pleased with the operating results, which we are able to report this morning. A couple of comments around that, we had some of the lowest unanticipated equipment downtime that we've recorded in many, many quarters fell from Q4 of '10 of 142 days to only 72 days in Q1 of '11.

Now we've worked very hard. We've got lots of programs dealing with responding [ph] to do preventive maintenance such that we don't have this, but it is -- we believe that that's related to that. But it is an event that will come and go. But we're very pleased with that. We also had a very low amount of shipyard and job preparation and mobe time in the quarter, only 168 days which is down 100 days from Q4 of '10 and significantly from Q3 of '10 where we were over 570 days in that nature.

So a more effective day rate utilization out there through a combination of preventive maintenance to prevent things from breaking, and a schedule where, for this quarter and Gary will talk a little about as we look to the next quarter, we actually have very few rig moves or contract preps or scheduled shipyard time, all of which benefits us greatly.

Now having said that, I would point out that we have 3 big rigs that are scheduled to return to work or begin recognizing higher revenue in the coming quarter. Let's start with the Ocean Monarch, which has been idle, really, since shortly after the events of a year ago. Today, we have an approximate 60 day job with Marathon in the 290s, where we'll be working here in the Gulf of Mexico.

The Ocean Victory has been recognizing a standby day rate, primarily, we do have some future commitments from this customer above 500,000 which we will begin, we believe recognizing some of that day rate in Q2. And then there are some farm out opportunities for that rig to work for additional folks, not at the $500 rate, but significantly above what we've been enjoying on a standby rate.

And then the Ocean America, which has a contract that lasts into next year with Woodside in Australia, has finished some shipyard modifications and special survey and has returned from Singapore and is working today. And that's in the low 400s. So all of those things well be positives that will come about as we go forward into Q2.

Now looking down the road in Q3 and Q4, that's when we begin to have a number of rigs that are scheduled in the shipyard, so those will be some negatives that will hit us in Q3, Q4. But again, we're certainly pleased with this $1.80 total earnings, including the recovery of about $0.06, I believe, related to collection of a bad debt. This was from the financial crisis where we continued to work for a company that went bankrupt. We lost all of our future contract, but for that work period of time, that was a claim that we were able to file in court, and a final disposition of assets came through and we collected that. So whether you want to look at $1.80 or, I think, discounting a couple of other very minor, non recurring items, we are down to $1.73.

So that lays the table as we go forward, we'll talk about the market and how we see that and prospects for our new drill ships through your Q&A. I'm going to turn it over to Gary Krenek to make some additional comments.

Gary Krenek

Thanks, Larry. As Larry pointed out, for the quarter, we made $251 million of bottom line net income or $1.80 a share based on revenues of $789 million. This compares to last quarter when we made $242 million in net income or EPS of $1.74 on $824 million.

Getting right into some of the specific line items on the income statement. The balance sheet was pretty clean as normal, so there's really nothing to comment there. On the income statement, looking at contract drilling expenses, those came in at $362 million, which was below our bottom line guidance. Our guidance last conference call was for it to come in at $370 million to $380 million. The two reasons for coming in below that low end of the guidance. One was, we decided to coal stack the Ocean Epoch on a rig that's located in Australia, Southeast Asia area. That rig was scheduled to come in to do a survey on it because of the excess cost of what we were going to have to spend on that survey, we decided to coal stack that rig so the fact of not having operating expenses for the second half of the quarter, plus saving the survey cost lowered our contract drilling expenses somewhat. Also, our continuing efforts to control cost continue to pay off in bring us in at the low end of our guidance.

Larry talked about bad debt expense. That was a negative $8.5 million as a line item. I won't talk any more about that. Depreciation came in slightly below our expectations at $101 million. We had guided to $103 million to $106 million per quarter for this year. Based on the information we have available now, we're expecting future quarters to come in at between $101 million to $104 million per quarter. Q2 will be a little bit toward the high end of that guidance simply based on the number of days. We have one more day in Q2 than we did in Q1.

G&A was $18 million, within our guidance of $17 million to $18 million. And we expect that to continue on a go forward basis also.

Now looking at our tax expense line where we had the biggest variance for the guidance we gave in our last conference call, we had an effective tax rate of approximately 16% for the quarter. Contributing to this low rate was a reduction to deferred income tax expense related to undistributed earnings from certain foreign subsidiaries. Due to the tax law change enacted late December of 2010, and in light of our new rigs being constructed, the company determined during the quarter that it would be more tax efficient to redeploy earnings of the foreign subs into new rig reconstruction rather than repatriating the earnings to the U.S. This resulted in an approximately $15 million one time reduction to our current quarter's tax expense.

Disregarding this reduction to deferred tax, the annual effective tax rate would have been approximately 21%. Our original guidance last quarter was for a tax rate of between 24% and 26%. This reduction this quarter is due primarily to differences in the mix of our domestic and international pretax earnings, as well as the mix of international tax jurisdictions, which we operate or expect to operate throughout 2011. Based on the current information now available, we're revising our estimate for our tax rate on a go forward basis to be somewhere between 21% and 25% for all 3 of the quarters remaining in 2011.

Looking forward to 2011 for the rest of our items, a big one, contract drilling expense. We gave out normal operating costs by rig type and rig location last quarter and those numbers remain consistent. If you calculate those numbers, you need to also add an additional $21 million worth of amortized mobe expense. Our per-day cost do not -- does not include amortized mobes because that number can vary from quarter to quarter.

So if you take the normal operating costs plus the $21 million amortized mobe, we expect to see contract drilling expense of somewhere between $360 million and $375 million in this coming quarter. As Larry pointed out, Q2 will be a very low quarter as far as rigs going into the shipyard for either some type of equipment modification repair or their five year surveys. As per our rig status report that we released yesterday or this morning, we only have 21 days expected in Q2. Q3, we will be up to 366 down days for rigs in the shipyard surveys, and that will include 7 rigs. And at that point, we will incur additional cost for those rigs going into the shipyard. So Q2 will be, as I've said before, somewhere between $360 million to $375 million. We expect to see those costs to go up in Q3.

Again, G&A, $17 million to $18 million for the rest of the year. The effective tax rate, as I said, 21% to 24%. And finally, our CapEx guidance that we gave last quarter which was $320 million worth of CapEx, that is in addition to the down payments we made on the new builds that we did during the first quarter of slightly over $300 million. That guidance remains in place and we will continue to expect to see that for 2011.

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

Lawrence Dickerson

Okay, so we'll take questions.

Les Van Dyke

Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Dan Boyd with Goldman Sachs.

Daniel Boyd - Goldman Sachs Group Inc.

Larry, maybe you can give us just a little flavor of what you're seeing out there in the market in terms of what regions are stronger from a tendering activity specifically in the mid water fleet? But I'd also like to get a little more color on the rate you might expect for the Monarch if you were to get a longer term contract? I think we've seen recent contracts well above the rate that you recently secured. But recognizing that is for maybe a shorter term and you just want to get back to work for now?

Lawrence Dickerson

Yes. I would say that the Gulf of Mexico rate is special situation, where we're putting it to work and we've met with the customer and sort of came to a conclusion. It's certainly came to a positive to us. We would be bidding that rig at higher rates in international markets. I think everybody needs to understand that there would be a long mobe to get there where move to zero recognition of both revenue and cost, which would be spread out in the future. So that would be the near term impact would actually be, it'd be positive from where we've been, where we've been idle and incurring costs, but it would be negative versus finding jobs here in the Gulf of Mexico. And that just depends upon the market where we're bidding. I've just broadly stated, we're in the 300 zone, up into the 400s, depending upon the kind of application and the term that we would be looking to put it. And certainly, it is working at a discount to DP units because of the fact that there's above costs involved. But there are a few markets, where this type of tool would be -- compete very well.

Daniel Boyd - Goldman Sachs Group Inc.

Are you seeing opportunity for it to get more term or are you in negotiations on that or bidding it in anything?

Lawrence Dickerson

Well certainly, we have 60 days here, so yes. Any of the jobs that we're talking about with any kind of term are going to be in the international market, rather than Gulf of Mexico. So we would be looking at additional term. I'm not sure at this point that we've had our hands around anything that's 3 years, but anywhere from pieces that we might put together of wells that would be small term on up to maybe reaching out to 2 years, would be things that we've look at up to date.

Daniel Boyd - Goldman Sachs Group Inc.

Okay. And then anything on, I guess, since last quarter, any changes in international market where you're seeing either strength or maybe weakness?

Lawrence Dickerson

I'm going to let Moe and Michael comment on that.

Morrison Plaisance

We're seeing some strengthening in certainly in Southeast Asia, in mid water and in deep water. West Africa continues to show some activity and we're proactive there with both the Ocean Valiant and the Ocean Confidence. So we other than the Gulf of Mexico, we see the market as doing well. I mean, we've got so many of our mid water rigs locked up in Brazil and continue to be.

Gary Krenek

Yes, I guess we have 4 mid water units that are cold stack, the Epoch and the Bounty, which are facing some investments in the market, although it's improving is not at the level that we're comfortable making those investments. And then we got too idle in the Gulf of Mexico, which is as much related to the permitting issue as age of the equipment and decreased demand frankly probably for mid water units here in the Gulf of Mexico.

Daniel Boyd - Goldman Sachs Group Inc.

That brings up an interesting topic because they're especially if you look back a year with the events at Macondo, there's a lot of fear out there that your rigs would become either obsolete or just require significant amount of CapEx to work to operate safely. Have you had the opportunity now, as the year's gone by, to go look through your fleet? Are there any did you feel comfortable with your beyond the 4 that are currently stacked, it was not requiring significant CapEx down the road? Have customers required you to do checks, and now that has given you more comfort? Or where do we stand on that in terms of potential CapEx?

Lawrence Dickerson

Well, most of the focus with any sort of specificity has been the deeper water units where you've got more room and typically, larger stacks so that you can meet those kinds of standards. The smaller mid water units typically have 4 Ram stacks and we may make some changes down the road. But we're not really looking at anything immediately that needs to be done to those rigs. Certainly, having brought up the one year anniversary, I can say the most significant things that we have done at Diamond Offshore is to ensure that our procedures and our personnel are in place and that we will continue to follow prudent drilling practices that have kept the industry safe and productive these many years, and I think that's what everybody needs to work on. We will meet the standards that our customers require of us. Obviously, I think everybody would recognize that certain older equipment, there's just not space to significantly increase the size of the BOP or say, the number of Rams that you handle. But again to come back to that, to date, that has not been an issue.

Daniel Boyd - Goldman Sachs Group Inc.

Okay. And I recognize the market clearly isn't strong enough today to reactivate some of the stacked rigs that you have and the Voyager, for example, in the Gulf of Mexico but if we look out a year, given where commodity prices are, the recovery in the Gulf, would you be surprised if you still had 4 rigs stacked and then can you just comment on which one you think is the best candidate to come back?

Lawrence Dickerson

I would say the 2 in the Gulf of Mexico would be our they're not facing the amount of modifications necessary that we feel on the 2 in Asia. So it's just magnitude of dollars and you've got Mexico as a potential market for those units. And really, if you look at the Gulf of Mexico, we have the Ocean Saratoga there, our only [ph] mid water unit, Transocean may be taking a rig out. So there really won't be much competition there. So it's got to come down to the demand. And you're right to hit the issue of high oil prices. High oil prices have traditionally brought forth more demand. I would say the biggest issue in the Gulf of Mexico is so many people are pursuing deeper water opportunities. So we just don't know yet who's going to operate in the mid water. But I would think that there's an opportunity there that if you have permitting return, you've already got infrastructure in the mid water, you've got very high product prices and you've got lower drilling costs to get these things hooked up and developed. So I would hope something would shake out there. But two big things: One, somebody's got to step up and do that; and two, the permits have to return.

Daniel Boyd - Goldman Sachs Group Inc.

Great, got it. Thanks, I appreciate all the time.

Operator

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

David Wilson - Howard Weil Incorporated

Just kind of as a follow-on to the previous questions and thinking about your fleet and the upgrades that you've done over time, are there any rigs left where you see major upgrades that make sense to become more competitive, given the high oil prices, maybe rigs like the Saratoga or the General, for example?

Lawrence Dickerson

As we said today, we're attracted by the low capital costs of new equipment in Korea. And so that forecloses a lot of things. Our engineering group continues to look and see where we can bring stuff up a notch or two and earn a return. But I don't see significant kind of upgrades as we've done in the past where, say, a Monarch or Endeavor, will take a less-than-2,000 foot unit and put it out to 10,000 feet with modern quarters and modern drilling equipment and all that stuff. You're just better off, we think, going to Korea or Singapore to build something new.

David Wilson - Howard Weil Incorporated

Sure. Larry, thanks for that. And then along those lines, you guys have been very good allocators of capital, making investments when the timing is right. Now with this third option pending, how do you view that as far as allocating more capital at this time in the cycle? As you mentioned, equipment prices are cheap, but are there any concerns that you guys having about kind of putting all your chips on the table here at this point or are you looking at it that way at all?

Lawrence Dickerson

I'd say that was one of the many ways that we're looking out -- also looking at these capital costs may be as low as they're going to get and the potential out there in deep water is significant around the world with many, many customers. And so there's a lot to be said for reasons that we would exercise that option. But we're going to let it -- we're going to keep it in place as long as we can.

David Wilson - Howard Weil Incorporated

Great, that's it for me, thanks.

Operator

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

Ian Macpherson

Larry, can you talk about the Endeavor and what your hopes and aspirations are for after Burullus mid-year?

Lawrence Dickerson

I'm going to turn that over to marketing. Michael?

Michael Acuff

Ian, as the report stated, we've got an option on the Endeavor, which, at this time, we feel like we have a good chance of exercising. So that would take it out for another 8 months or so. We've seen a lot of interest in the Endeavor there in the Med. It's not a matter of that, not having interest, it's really a highly sought-after rig there. But with that being the case, we think Burullus is probably interested in keeping that rig for a while.

Ian Macpherson - Simmons & Company

Okay. And when it says price, that's the same price that we see, mid-220s?

Michael Acuff

No, I think...

Lawrence Dickerson

It's higher, but it's still in the twos.

Michael Acuff

Yes. Yes, it's in high 2s.

Lawrence Dickerson

The was part of the deal that we cut when we [indiscernible] wanted to get the rig out of the Gulf.

Ian Macpherson - Simmons & Company

Your friends at Noble were pretty bullish about the jack up market globally tightening on their call a little while ago, and I wonder what your perspectives are with regard to standard jack ups seeing improved demand in your interest of operation.

Lawrence Dickerson

I guess I would say we've generally seen more demand than we probably had 6 months ago, but it's certainly hasn't bust out yet on the rigs that we're operating. I mean, we've got 2 -- Egypt that will be tied up for a while, and we've got 1 in Thailand, is one that we're it has near term availability that we're marketing. And we've got an idle rig in the Med [Mediterranean]. It's just a very poor location for it. So that's probably the one that we'll look at relocating somewhere.

Ian Macpherson - Simmons & Company

Okay. Thanks.

Operator

Your next question is from the line of Doug Becker with Bank of America.

Douglas Becker - BofA Merrill Lynch

I was just hoping to get your thoughts on the Brazilian market in general and specifically the pulled 1,500 meter tender and the 3,000 meter marketing query, what your expectations are there.

Michael Acuff

Yes, Doug, on the 1,500 meter inquiry, there was some procedural issues there that made Petrobras pull back on that. But we're very confident that they're going to come back out with a similar tender and try to fill those slot, and we've continued to see that demand probably a couple or 3 rigs, at least, with that tender is what my expectations would be. On the 3,000 meter, that's a marketing inquiry, where it's more aimed towards the pre salt. Again, we think they're going to take a couple of rigs there and we're very positive on Brazil. We continue to see the market there. It's just a matter of procedure and getting through the various processes and tendering processes they have to take the rigs. But every day, we see more demand as they make announcements and we're very high on Brazil.

Douglas Becker - BofA Merrill Lynch

And then I think it's pretty clear why the Epoch was stacked. What do you make of a Transocean stacking a number of semis? Does that give any indication of how they see the market?

Lawrence Dickerson

You know, I can't really guess. But when you look at a fleet, you're talking about their older semis, that I any of the issues that we're facing with required investment to keep them competitive are not unique to us, should be clustering around most rigs of that age. So that would be my guess, but that's all it is.

Douglas Becker - BofA Merrill Lynch

Fair enough. And then just a quick one for Gary. If the option's exercised and another rig is being built, is there a potential for another one time benefit to the tax rate?

Gary Krenek

No. No, the decision here was one time and we cleared everything out with that.

Douglas Becker - BofA Merrill Lynch

Fair enough, thank you.

Operator

Your next question is from the line of Janice Rudd with Pritchard Capital.

Janice Rudd - Pritchard Capital Partners, LLC

Just to clarify, do you have a CapEx number for the first quarter and did that include all the down payments that you needed to make?

Gary Krenek

Yes, that was all the down payments. We paid approximately $310 million, between $300 million and $310 million. And then on maintenance capital, we incurred about $45 million in the first quarter.

Janice Rudd - Pritchard Capital Partners, LLC

Great, thank you very much.

Operator

Your next question is from the line of Arun Jayaram with Crédit Suisse.

Arun Jayaram - Crédit Suisse AG

Larry, I just wanted to discuss your philosophy regarding fleet renewal. Historically in this space, offshore drillers such as yourself have built rigs when conditions were getting better in kind of distinct periods. I was wondering if as you think about fleet renewal, could we go to a situation where you do - announce a couple of rigs every year and you methodically look at renewing the fleet rather than these distinct periods like we saw in '96, '97, '98 and things like that? So just maybe your philosophy regarding fleet renewal going forward.

Lawrence Dickerson

Well, I mean, as you know, the return on capital employed records that we have goes back 10 years. And so the way we're able to pursue that is to constantly look at what it costs us to put money to work and what the prospects are. So a phased 10 year plan where we did something like that might make a lot of sense, but it'd be only something you would see in retrospect. We're not going to commit and say we're going to go on a 10 year plan, everybody needs to be prepared for one rig a year because I think we'll maintain that -- do our best to maintain our capital allocation best if we do that constantly gauging the market. For instance here, if we exercise this option, in a very short period of time we will collect [ph] $1.6 billion or $1.7 billion to work in improving the fleet at this one time.

Arun Jayaram - Crédit Suisse AG

I got you. Second question, Larry, and I don't know if you can answer this or not, but there's a pretty detailed description in the Pride proxy, a lot of people suggested that maybe DO at some point was interested in Pride. I was just wondering if you could comment on your thoughts on M&A and consolidation going forward.

Lawrence Dickerson

Well, we believe that the benefits of the M&A accrue to everybody in the space because you have fewer bidders out there. But at the same time, it's not like we're going to consolidate down to 2 or 3 entities because you've seen few barriers to entry. There's a number of folks out there that are now competing in ultra-deep water with vessels. So that's hard to say. And then the acquisition 101 in this business is that there's very little premium that you can pay because there's very little cost savings to be had by combining 2 fleets together. So to me, it's just very opportunistic. Oftentimes, the combined entities are in a great shape, but if you go back and look one side or the other, the shareholders had to take some value reduction to get the transaction done, it seems to me.

Arun Jayaram - Crédit Suisse AG

Right. And the last question is for Gary. Gary, I think your previous full year 2011 operating cost guidance was around $1.5 billion. Any changes to that number or are we at the same place as we were 90 days ago?

Gary Krenek

No, at this point we're still at that $1.5 billion. We'll have slight amount of savings from the Epoch not working, but it's going to be lost in rounding. As I said, we're going to be under -- below the average in these first two quarters, and the next two quarters we will definitely -- the third and fourth, we will be above the average, number one. Costs normally tend to increase in the second half of the year. You place your budgets, you order equipment, prepare to do the work, in the first half, you do it in the second half. So that normally drives cost up. But then when all of the downtime from the surveys, being second-half loaded this year, we'll get hit with that also. So the $1.5 billion is still our best guess.

Arun Jayaram - Crédit Suisse AG

And the lower tax rate was just driven by the new builds and just a reassessment of where you thought the earnings was coming from?

Gary Krenek

Well, yes, and the new builds and the tax planning that we did, that's just $15 million. So that's not that much on an overall basis. The biggest thing is, where we believe our earnings are going to come from, whether it's on our domestic -- our rigs that are in our domestic structure versus international. And then internationally, the rate can vary greatly, and it suits [ph] us as we continue to get more clarity on where the fleet's going to be.

Arun Jayaram - Crédit Suisse AG

Okay, thanks a lot.

Operator

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

Robin Shoemaker - Citigroup Inc

I wanted to ask you about the very substantial jack up in tenders that are coming out of Mexico here recently and your rigs that might be suitable for that, including the Columbia, Titan, Spartan. Also, I want to ask you about the price ceilings that are stipulated in those tenders. How do you feel about price ceilings?

Lawrence Dickerson

I'll let Marketing comment on that who's much closer to the. . .

Michael Acuff

Robin, no, it's been very positive as far as the number of tenders going out [ph]. I think we're up to 15 or so jack up tenders currently. With respect to assets, we've got several assets that we would consider. You have some here in the Gulf that are working that could possibly go down there and also then we have an international asset, say like the King, that it has a mobe to it, but it may have a fit to working with PEMEX. So we see these opportunities as good opportunities to put some of our rigs to work. With respect to the price ceilings, obviously, we're not that's not the way we like to bid rigs. But since it seems to be their process at the moment, we're in discussions constantly about what that right number should be and where it should be and I think they're seeing that through their responses to some of their tenders. So that's continuing to be a developing thing, but that's the process they use at the moment. Again, we're very excited about Mexico and the opportunities to put some rigs to work down there.

Robin Shoemaker - Citigroup Inc

And also they had it was 15 jack ups [ph], there was one or was it 2 semi?

Michael Acuff

There's currently 1 semi out there, a 1000 foot tender for about 930 days starting in September. So that's a very interesting opportunity possibly for one of our mid water rigs in the Gulf of Mexico or somewhere else. So again, we're starting to see these flow more which has turned positive for us.

Robin Shoemaker - Citigroup Inc

Okay. And just one other clarification. You mentioned on the 1,500 meter tender in Brazil, that there were some procedural issues that led to the cancellation. There were some signs also that Petrobras felt the prices of the 10 rigs that were offered were a little on the high side. At least they were compared perhaps to what they signed, the Ocean Courage and Valor, for last year. Was your understanding that, that was part of the reason for the cancellation?

Michael Acuff

From our view, no. We don't have any indications that, that was the reason. We understand it was more procedural. And it will be interesting to see where the 3,000 meters come out and I think that will give us a better indication of where the market is down there.

Robin Shoemaker - Citigroup Inc

Okay, thank you.

Operator

Your next question is from the line of Matt Beeby with Global Hunter Securities.

Matthew Beeby - Global Hunter Securities, LLC

You all had mentioned the rigs, the jack ups in the U.S. Gulf as being candidates for Mexico. Would you potentially abandon the Gulf and would rigs going down there potentially include Spartan that's now cold-stacked?

Lawrence Dickerson

Well, the nice thing about Mexico is they give you a fixed number of days, most of which are fairly long, much longer than we're able to get in the Gulf of Mexico, so -- the U.S. Gulf. So we would, under the circumstances, abandon the Gulf as you put it, and move down there. I doubt, though that demand would be such that we will totally remove our rigs from the Gulf of Mexico, that we would end up keeping some here. So on the margin, you've got to look at what the rates are in the Gulf of Mexico to determine how many rigs we work.

Matthew Beeby - Global Hunter Securities, LLC

And if the demand was there, would all 3 of those plus the King have the proper specifications for working there? Your competition had mentioned something about the increase in specs over the recent years that PEMEX was not looking for.

Lawrence Dickerson

Well, the specs have gone up and down and certainly, the King and the Titan would be the first 2 rigs that we have there most. The Titan has been there before and the King, we're comfortable that the spec would quickly meet Mexico. The Spartan would be a little bit more of a push for us to have that rig work down there.

Matthew Beeby - Global Hunter Securities, LLC

Okay. One more quick one if I can. The cash flow outlook for you guys is very compelling in 2012. How do you all look at potentially increasing your dividend? Can you talk about that a little bit?

Lawrence Dickerson

Well, as we've said in the past, at each dividend, the board evaluates a number of factors in setting that dividend. So it would depend upon what's present. If you look in the past, our increases in dividends have generally come at a point in time where we've had increases in day rates and although day rates are moving a little bit today, I don't think they've significantly moved. So that would be one thing I would look at. But again, everything's up. We recognize that dividends are an important part of our ability to return value to shareholders and looking in the rear view mirror, we will have paid $28 in total dividends since we began our special dividend program, I guess 4 years ago, 2006. So that's something that we're committed to, but we do say that will be set at each quarter.

Matthew Beeby - Global Hunter Securities, LLC

Okay, thank you.

Operator

Your next question is from the line of Joseph Triepke with Guggenheim Securities.

Joseph Triepke - Guggenheim Securities, LLC

Larry, a question for you. Last quarter, you had discussed higher costs in Brazil on demand for skilled labor. I was wondering if you foresee any set of a bottleneck on skilled labor globally could potentially accelerate cost inflation as we deliver new rigs here as an industry. And sort of on that subject, do you think the potential role of experienced crews from older rigs to newer equipment could help to kind of curb sort of a global inflationary outlook for labor?

Lawrence Dickerson

Yes, you're right that there is a huge demand for skilled labor. As I addressed the events that occurred a year ago, I said the number one thing is the making sure that we got procedures and personnel in place that can continually apply prudent drilling operations to deliver safe and environmentally non risky results. And so that does come down to people, we've recently given very large raises, we've established retention policies for critical skills. So to some degree, there will be people coming off of older rigs. The biggest thing, though, is we've got to attract new personnel into the industry and provide training and retention opportunities for that. I think we're in a world right now where jobs are in high demand. These are very high paying jobs. But we need to plan down the road. It's not something that we just run an ad in the paper and then the skill set up appears. And so I believe that us, and the various other drilling contractors, are engaged in efforts to increase training and to source personnel from around the world. And that's one of the things that just frustrates me so much about the slowdown, the moratorium, the lack of permits, the lack of clarity in the Gulf of Mexico, is that if I don't have any rigs in the Gulf of Mexico where I can train these people, I'm not going to hire untrained Americans and put them on an airplane and fly them to some other location. That just does not make any sense. So I would look in the absence of something stepping up that we will begin sourcing a number of our personnel from overseas. And so you're going to be taking these high paid American jobs and seeding them overseas. And as best I can tell, that definitely is not having any impact. No one's really recognizing that in the government. And when we and others go down that path, it's going to be very difficult to reverse it. So that was my soapbox today.

Joseph Triepke - Guggenheim Securities, LLC

Thanks, Larry, that's excellent color as well. One unrelated follow up, if I may, for Gary. If I could ask you to kind of look at into the crystal ball, understanding it's very early for any kind of guidance, can you give us any indication at this point as to whether 2012 and 2013 are sort of up, down or flat relative to 2010 and 2011 in terms of yard time and surveys on your fleet as it stands now?

Gary Krenek

Yes, 2010 I'm sorry, 2012 will be -- we'll still have as many rigs in the shipyard as we did in '11. We're looking at 9 or 10 at this point. So yes, we're going to have a large downtime in '12, probably fairly significant in '13 again and then we go down for the next 2 years.

Joseph Triepke - Guggenheim Securities, LLC

Okay, very helpful, thanks.

Lawrence Dickerson

Thanks, everybody, for joining us. We're going to return to work and try to continue to deliver the results that will be pleasing to our shareholders.

Operator

Thank you all for participating in today's Diamond Offshore Drilling's First Quarter 2011 Results Conference Call. You may now disconnect.

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