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Diamond Offshore Drilling (NYSE:DO)

Q4 2011 Earnings Call

February 02, 2012 10:00 am ET

Executives

Darren Daugherty -

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

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

Michael D. Acuff - Vice President of Contracts and Marketing

Analysts

Ian Macpherson - Simmons & Company International, Research Division

Collin Gerry - Raymond James & Associates, Inc., Research Division

Judson E. Bailey - Jefferies & Company, Inc., Research Division

David Wilson - Howard Weil Incorporated, Research Division

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Todd P. Scholl - Clarkson Capital Markets, Research Division

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

G. Scott Burk - Canaccord Genuity, Research Division

Andreas Stubsrud - Pareto Securities AS, Research Division

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond Offshore Drilling Fourth Quarter 2011 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Darren Daugherty, Director of Investor Relations. Please go ahead.

Darren Daugherty

Thank you, Brandy. Good morning, everyone, and thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; and Michael Acuff, Vice President of Marketing.

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 and 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 concerns, investors and analysts should not place undue reliance on forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements.

After we have discussed our results, we'll have a question-and-answer session. [Operator Instructions] And now I'll turn the call over to Larry.

Lawrence R. Dickerson

Thank you, Darren, and good morning and welcome to our end of the year and fourth quarter conference call. Well, I'm going to start off by talking a little bit about the market. We do not have any banner dayrates to announce today nor have we announced any recently, but that doesn't mean that there's not intense interest in a number of our rigs across a number of markets.

If we just back up for a little bit and put this in perspective on where the market is now versus where it was a year ago, we're seeing a very strong market. We're seeing that the continuation of oil prices at or above $100 for that time period is obviously having, in our judgment, an impact on our customer as they take this oil price in and become increasingly comfortable that, that is the go-forward price that they can count on.

We've had the North Sea firm up a year ago. We had very little forward visibility. We're concerned about working rigs through the winter, and now we've got backlog in place. We're returning the Guardian from the Falkland Islands to that market for a term contract.

And in addition to that, Mexico has really come on very strong. We currently have 4 jack-ups and a semi in that market. A year ago, we had 2 jack-ups there, with less than a year of forward visibility. And now we're right at 10 years of commitment spread across those 5 rigs. So Mexico stepping forward, taking up jack-ups, bringing in floaters, is certainly also a real net positive we believe. In the Gulf of Mexico, we continue to take rigs out of that market, so we're now down to one jack-up and one semi, the Ocean Victory. We've got good demand for both units. We're seeing in the jack-up front that there's a number of small players that are seeking to find well places, oil plays, among other things to put jack-ups to work. And then really with just our sole semi and the 3 of 6,000-foot market, with very little competition, we're seeing great interest in that particular unit as well.

Over in Indonesia, where we have had a presence since the early '80s, we were down to our core jack-up over there. The Ocean Sovereign has since been cold stacked, and we had the Ocean Rover working in that market for a short-term period. But since then, we've committed the Ocean Monarch for a full year program, so we're glad to continue in that area. And I think that also shows just that you've got lots of interest around the world in areas that people believe that they can develop lots of production that will be profitable at these type of dayrates.

And then the most recent activity that we've gotten is the announcement of the construction of the Ocean Onyx. That has begun in Brownsville, and we're targeting a mid '13 delivery on that unit. So the quick turnaround is certainly an advantage to us as is the low capital cost of approximately $300 million, and we've got interest in that unit already. We're not ready to comment particularly on where that market is. But I think if you watch the Ocean Victory, which is a similar rig, the Onyx will have more capability for sure, but they will service similar market. And as you see what sort of commitments we may have on Ocean Victory going forward, I think that will give you a good clue on where the demand might be for the Ocean Onyx, certainly, in the.Gulf of Mexico. And of course, there was new interest in it in other Atlantic Basin areas that we could put the vessel to work.

Following the Ocean Onyx, we have one more opportunity to do a similar development where we could deliver new capacity to the fourth-generation market. And we're pursuing that from an engineering standpoint at this point and don't have anything else to announce on that.

And then finally, over the past year, we did commit the Ocean BlackHawk and BlackHornet to Anadarko, and we have one more rig in that class to be marked. There's a lot of rigs at that delivery point, so I wouldn't necessarily look at this moment that we're going to have a commitment for it. But as we look forward to demand, we're very comfortable that virtually all of the rigs that are being constructed in that time frame will be committed. And of course, the Ocean BlackRhino, we think that's the coolest name in the whole oil field, and we hope that our customers will think the same thing.

So with the -- that is sort of my commentary on the market. Gary Krenek will be talking about cost guidance, but let me comment a little bit on that. Obviously for the quarter, we were mostly impacted by a very favorable change in our tax rate, and Gary will talk about that. But from our operational standpoint, I'm pleased with our execution. We had 146 days of unanticipated equipment downtime, which is up from an average of about 85 a quarter for the first 3 quarters of the year, but well within our target operational envelope. And so we're pleased with that.

We had 570 days of shipyard on mobe time. And of course, that we try to provide guidance so that you know that, that's coming, and that was up from what we've been experiencing during the year. We've got a number of surveys on a go-forward basis, but we think that, that's a large number. And we believe that, that will come down.

Our OpEx was also within guidance, I believe. Recently, Gary had indicated to you that our total OpEx would be right at $1.5 billion for the entire year, and we came in at $1.550 billion, which we'll declare victory on that, that we were comfortable going forward.

So really the story at Diamond Offshore, we'll be watching the market in the coming year, in the coming quarters to see what sort of commitments we have there. And then we will continue to work very hard to execute, to deliver on the dayrates that we have, both from a downtime standpoint from an operating cost.

So with that, I'm going to turn it over to Gary and let him elaborate on some of the numbers that you saw for the quarter.

Gary T. Krenek

Okay. Thanks, Larry. I'll talk a little bit about the fourth quarter, and then we'll go into some detail as to what we expect to see in the coming year in 2012.

For the quarter just ended, we had net income of $188 million or $1.36 per share, this coming on contract drilling revenues of $734 million. As Larry said, the -- our downtime for planned regulatory surveys and shipyard downtime was up in the fourth quarter, just as we had forecasted it would be, and that impacted our revenues and of course, then impacted the bottom line. But a total of 5 rigs in the shipyard in the fourth quarter had missed all or most of the quarter and were off dayrate.

We also had an additional 4 rigs that we're mobing to various areas in the world, mobing 2 contracts, and that affected us in the fourth quarter. Again, all of these came in about at the amount of time that we had forecast and have released on our rig status reports earlier. The big thing that impacted positively the quarter was the tax rate, and I'm going to talk about that in just a second.

Looking -- getting a little bit more specific on some of the line items in the income statement for Q4. Contract drilling expenses, we guided in our last conference call and said that they will come in between $410 million to $420 million. That actually came in at $407 million, so just slightly under our guidance. As Larry said, cost control is a top priority here at Diamond Offshore, and we continue to follow through on that and provide numbers set within our guidance or slightly below.

G&A and interest expense came in close to what we had indicated in our last conference call. Depreciation expense was slightly below our expectations, and this was due to a normal year-end adjustment. We booked our depreciation through the year and have to true it up at the end of the year. We ultimately underspent our capital by about $25 million in 2011, and this gave rise to the fourth quarter adjustment that we had. It was about $6 million. So other than that, we would have come in within the guidance of the depreciation.

The big thing, of course, in the quarter was the tax -- effective tax rate. Our effective tax rate for the fourth -- for the year was 18.4%. We had expected it to come in at somewhere between 21% and 24%, and there's a couple of reasons for the lower rate. But first of all, in the fourth quarter, we had reduction in our liabilities for uncertain tax positions, for your accounting and tax type, such as FIN 48 accrual. We have some time-sensitive issues in that accrual that turned in December -- actually, at the end of December and as a result, caused us to book some credits to our tax expense as these items expired. They were items that we could anticipate but for GAAP reasons, could not recognize until the timing actually expired on these items. And therefore, it drove our tax expense for the quarter down.

We also had our normal year-end true up, domestic versus foreign earnings and also where we're earning those foreign earnings at. We do report tax rate every quarter in accordance with GAAP. Whether you're still always working with estimates, we, finally, in the fourth quarter, get to work with actual numbers and that caused the rate to change a little bit.

So the -- our rate actually was down a couple of percentage points lower for the year than what we had anticipated. But because we had to book that accumulative adjustment in the fourth quarter, it caused the Q4 tax rate to be 7.5%. And I'll talk about the next year's tax rate in a second.

As Larry said, we had forecasted our rig operating expense or contract drilling expenses to be approximately $1.5 billion. We did that in our fourth quarter conference call a year ago. They came in at $1.550 billion. And so as he said, we'll declare victory there and think we did a pretty good job.

Looking forward to 2012, we're forecasting those same contract drilling expenses to increase by about $100 million and be somewhere in the neighborhood of $1.650 billion. The increase is due to a couple of things. First of all, we are anticipating doing 12 special surveys this year, 11 floater rigs and one jack-up. This will also, of course, have an impact on down days in our revenues. And rather than going through the detail there, I'd point you to our rig status report that we issued yesterday evening, or we also have on our website to see the timing of those surveys and the actual number of the down days expected with all of them. We also have -- are seeing some increases in labor cost in the industry, along with training costs, as we gear up for additional rigs coming into our fleet. These 2 items will make up the bulk of the remaining increase in cost '11 over '12.

There is some general inflation that we're seeing in the industry. However, that will for the most part, we believe, be offset by the fact that we cold stacked a couple of rigs in 2011. We incurred the cost in '11 for those rigs. We won't incur it in '12. And so that savings will, we believe, offset the general inflation. Again, contract drilling expenses will be about $1.650 billion for 2012.

Just a little bit more color on that. During the year, we expect to see normal rig operating costs, as we always do, plus the survey costs for the 12 rigs that we'll have coming into survey. Those survey costs, we believe, will run us, in addition to their normal cost, about $5 million to $7 million additional above operating cost for each of the rigs, with the exception being the worker in the Star. But we think those costs will be $8 million to $10 million above the operating -- normal operating cost. And conversely, the Guardian and the King, we think, will be somewhere in the $3 million to $5 million range with the surveying and repair-type cost.

Mobe and amortized mobilization cost for 2012, we believe, will come in somewhere around $90 million. First quarter, we will incur about $45 million of that $90 million. The remaining Q2 through Q4 will be somewhere in the $14 million to $16 million range. Q1 will be high for 2 reasons: Number one, in 2011, we mobed the Ocean Monarch from the Gulf of Mexico to Southeast Asia. The initial work on that rig when we got there was a 4-month job. We have since signed that up, and that rig is committed for an additional 4 years. But because of accounting rules, we are having to amortize that mobe over just the initial 4-months job. The rig got to Southeast Asia in December, so we recorded a little bit of that in the fourth quarter this year. But we'll write the rest of that mobe off in the first quarter.

Also, we have the Guardian that is mobing from the Falkland Islands to the North Sea. It will do its survey in the North Sea and then go work for a 2-year commitment with Shell. But again, accounting rules, because we're going to a survey, requires us to expense that mobe currently rather than amortizing it over the length of the contract. So we'll see $45 million in Q1 for that.

Again, I would remind everyone that these amortized mobe cost for the most part are offset by amortized mobe revenues that we've received. As always, I remind everyone that I've been talking about the line in our income statement, contract drilling expenses only. But these numbers do not include cost incurred in the line, reimbursable expenses. We give no guidance for reimbursable expenses nor do we give guidance for reimbursable revenues. If you look at that, they almost always net to a very immaterial amount. So that was $1.650 million contract drilling expenses only.

Looking at just the first quarter of 2012 for contract drilling expenses, we believe Q1 will come in somewhere in the $405 million to $420 million range. This will be comprised of the normal rig operating cost; the Baroness survey cost, the Baroness, we'll do in Q1; and then the mobe cost that I talked about earlier.

Other line items in 2012. G&A, we believe, will be flat with the prior year. It'd be somewhere in the $17 million to $18 million range each quarter. Depreciation goes up slightly due to capital expenditures and will be in the $105 million to $108 million range per quarter. And interest expense, our gross interest on our debt is $22 million per quarter. We will be capitalizing a portion of that during the year. We estimate right now approximately $8 million per quarter, which will give us a net interest expense on the P&L statement of approximately $14 million.

Looking at the tax rate for 2012. We are right now estimating net tax rate to be somewhere in the 27% to 29% range, so a pretty significant increase over 2011. There are a number of reasons for that. First of all, expiration of the tax extenders bill, which expired on December 31 of this past year. This law included the provision that allowed the company to defer, recognizing certain foreign earnings as U.S. taxable income, until such earnings are repatriated back to the U.S. With the expiration of this law, certain foreign incomes will now be taxed currently in the U.S, thus increasing our effective tax rate for the year.

Secondly, for the past 15 years, we've recorded a tax deduction or amortization associated with our acquisition of Arethusa drilling back in 1995. Those deductions were fully amortized last year and thus, we don't have benefit of those deductions in 2012 or any time thereafter.

Third, as I said earlier, we had a fourth quarter reduction of our FIN 48 accrual. This reduced our overall tax rate for 2011, and we're not able to forecast any similar reduction to -- for 2012. So we're not going to see a credit for that, we don't believe, at this time in 2012. And finally, the normal mixture between domestic and foreign earnings always has an effect on our tax rate. We've put that into our model, wash it through. And as a result, take all of these things in account, we now expect a 27% to 29% tax rate. We'll, of course, be updating that quarterly as the year progresses.

And finally, capital expenditures for the coming year, we believe we'll see maintenance capital of $330 million. Our guidance last year was $300 million. We came in at about $275 million, so we had some rollover into 2012. So when you take that into account, maintenance capital is about flat year-over-year. And then we also expect to record about $220 million of capital for our new build rigs, primarily the Onyx, but we'll also see some capitalized cost for oversight of the drill ships and of course, the capitalized interest on the drill ships. So in total, we expect to see $550 million of CapEx for the year. Approximately $100 million of that will be spent, we believe, in Q1.

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

Lawrence R. Dickerson

Okay. I think we're ready for questions, Darren.

Darren Daugherty

Operator, we'd like to open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ian Macpherson with Simmons & Company.

Ian Macpherson - Simmons & Company International, Research Division

Gary, just as a point of clarification, the $1.65 was inclusive of the survey costs or before survey costs?

Gary T. Krenek

No, that's inclusive of everything, Ian, survey cost in and before.

Ian Macpherson - Simmons & Company International, Research Division

That's what I thought. Okay, follow-up question on the market really. Larry, really, just a true or false. It sounds like the fourth-generation market could be poised for improving dayrates and term combined, which would be quite a difference from what we've seen for the past couple of years for the 2012 fixtures. Is that a true?

Lawrence R. Dickerson

As you said, it could be, so yes. I wish that would be the case. To elaborate on that, I'll let Michael speak, but we're very enthusiastic about that market or we wouldn't have committed to the Onyx.

Michael D. Acuff

Yes, I know, Ian, we're seeing in the Gulf of Mexico -- in particular, if I work through the markets, we're seeing some demands start to be realized here in the Gulf as some customers continue to work that water depth area. Of course, West Africa, there's a strong demand over there at the moment, and that's in various water depths, from deepwater to ultra-deepwater. And then even in Southeast Asia, we're seeing this water depth where there's -- for this market where there's demand in this water depth. So we're quite positive on this market, like Larry said, or we wouldn't have done the Onyx. We're seeing -- we think we'll have significant term with some of these assets and of course, dayrates increasing. So without getting specific, we're seeing a general worldwide demand in deepwater that continues, and we feel like it's an opportunity for us to service to that market.

Operator

Your next question comes from the line of Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc., Research Division

So quick question. I guess -- and you might have gone over this a little bit, but the kind of channel checks we're doing in the industry seem to indicate a lot of uncertainty into how to kind of write the contracts in the post-Macondo world. How do you kind of decipher between who's paying for the downtime, if you have to pull a BOP and all the new regulatory issues? Could you maybe talk to a little bit to that? And I think it's been kind of handed to me that a lot of it has to do with how the manufacturers recommend the kind of maintenance cycle on a BOP, and so it needs to get rewritten into the contracts as unpaid or paid downtime. And how does the new contracts compare to the older legacy contracts that we're currently working off right now? Long-winded question, but hopefully, you got that.

Lawrence R. Dickerson

Well, yes, if I can design an ideal contract, it would involve, at the end, each well whatever time it takes to do the BOP work, would be compensated downtime. And of course, that's quite a bit different from where we are today. We've seen over the past 5 or 6 years just a change in operations in that. It used to be that it would take more time to move from one location to set up another well, and you would have a normal 2 or 3 days built-in, where you could perform your maintenance on the BOP stack. And now at these dayrates, as you can imagine, our customers are intensely focused on trying to reduce nonproductive time. So we actually lose ground over time, and that they maybe ready to go. And so we don't get as much downtime. And we're pushing wherever we can to expand that, but that's an ongoing process. There's other issues as well on the contracts. Michael, do you have any things you've noted?

Michael D. Acuff

No, I think we're still working with the similar model we had pre-Macondo. Of course, there's always pressures depending on the market of clauses changing here and there. But in general, we look for downtime banks or paid time to maintain our equipment between wells or recertifying with the customer. And we continue to do that. Again, like Larry said, it evolves a bit customer to customer. But in general, I wouldn't say, we've seen a big shift in contracting and the way contracts are done from a historical standpoint. But it's something that continues to evolve as we go forward and regulations come out of different requirements are put before us.

Collin Gerry - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. Last question for me. You got some cold stacked assets in the Gulf of Mexico. That markets looks -- sorry, in the jack-up side, that market looks to be improving, not gangbusters, but it looks to be getting better. Any prospects for reactivating those rigs or rigs where they need to be, and maybe just a little color there?

Lawrence R. Dickerson

Of the 4 idle jack-ups we have in the Gulf of Mexico, one is the Ocean Spartan, which is a 300-foot unit, and I think that's the highest prospect. We have actually talked to various operators about that rig suited for some programs. So that's something that could happen. The other 3 are mat jack-ups. And although that market has strengthened, we're not really looking to reenter that market. I think it would be much more likely that we would be able to sell those rigs to somebody else who would have the scale of operations and be sized to operate those rigs in a manner that it's just not worth the effort for us.

Operator

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

Judson E. Bailey - Jefferies & Company, Inc., Research Division

A couple of questions. First on surveys, you outlined all the 5-year surveys for 2012. Can you give us a broad sense of what that number could be like in 2013? And I understand you don't want to give details but in general, would it be higher or lower or maybe about the same in terms of modeling 2013?

Lawrence R. Dickerson

Judd, right now, we believe we'll have 8 surveys in '13. And of course, that's subject to adjustment but -- so slightly lower than what we're projecting in '12.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay. And then on the operating cost guidance you provided in the fleet status last night, it seems like, I guess, operating cost in some of the Brazil floaters are probably moving higher. As we model that through, should we also increase the rate to offset those higher costs or has that already been accounted for in the fleet status reports as you kind of bump up the rates as you get cost pass-through on those contracts?

Lawrence R. Dickerson

As we get the increase, yes, we bump up the rates in the rigs status report.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay. But if it's up for 2012, should we assume you're probably going to get that? In other words, it hasn't been reflected yet in the fleet status you have already but it's probably what we would probably see it if those operating costs proved to be true. Is that...

Lawrence R. Dickerson

We will not change that rig status report until we actually get an increase in rates. So it's not reflected on a go-forward basis.

Judson E. Bailey - Jefferies & Company, Inc., Research Division

Okay. And then my last question was, just to circle back on the Ocean Victory and the Gulf. As you noted, you do have some availability and the Gulf is picking up. Can you give a little more color maybe to the type of opportunities? Are they still more well to well or are you seeing some longer-term opportunities beyond, say, maybe one year for that kind of unit?

Michael D. Acuff

Yes, Judd. As you're aware, the supply here is somewhat limited in that market where the Victory is at. So what we're seeing from customers are longer term. They're starting to get more visibility, and it's shifting from the well to well or 6-month type programs into more year, 18 months [indiscernible] years of discussions that we're having with customers. So like I say, that again is that we're -- we think we're well positioned for us so longer term and better rates, I think, in the Gulf for that rate.

David Wilson - Howard Weil Incorporated, Research Division

Okay. And are you, for a longer-term contract, are you providing any type of discount or is the market strong enough that it's pretty much the same for spot versus term at this point?

Michael D. Acuff

That depends on the situation. But I would say, that spread has tightened quite a bit compared to what you may traditionally think of the trade-off of term for rate.

Operator

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

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just a question on the Saratoga. Are there enough work in Guyana to keep it down there or did that potentially moved back to the Gulf of Mexico, just given the strength we're seeing?

Michael D. Acuff

Yes, John, we continue to look at Saratoga and the opportunities down there. We think there are some additional opportunities. I won't tell you that it's visible or we've got something more concrete at the moment. But there's work in the Trinidad area. There's continued work down there in the Guyana-Suriname type area, but we'll continue to investigate those. Otherwise, we'll come back to the Gulf because we've still got customers that would like to use the Saratoga here. So we'll just have to see how it develops going forward and if things come together in time. If they don't, we'll bring the rig back.

John D. Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And what would the mobe cost be there to bring it back?

Michael D. Acuff

We -- it's about 30 days to get down there and back, and we typically do that. I think on the Saratoga, we've got a dayrate and tugs-type scenario. So from an all-in number, you'd have to do the calculation.

Operator

Your next question comes from the line of Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I had just 2 quick questions. One, you kind of mentioned the jack-ups in the Gulf of Mexico that are stacked and a potential divestiture of some of the older mat jack-ups. Can you give us a progress update on that? I know we've heard that there's several interested parties. I mean, how close do you guys think you are or is that something that's still quite a ways away? And then secondly, with the Asia Pacific market kind of heating up, we've heard that there's 3 or 4 tenders potentially out there in Vietnam with varying lengths of 6 or 7 months, particularly for the jack-ups. With the Sovereign still stacked there, is there the possibility that could be going back to work soon? I think that still needs kind of a 5-year survey, which I'm guessing would probably be in that kind of $3 million to $5 million range. At what length of a contract that kind of would it make sense for that to go back to work?

Lawrence R. Dickerson

The -- on the mat jack-ups, I mean, we're not really serious about that. I was just indicating of the possible futures that we probably might explore a sale ahead of putting them back to work. But it's not at the point that anybody should be booking that on those vessels. The Ocean Sovereign has not been down that long. It's facing a survey, so there's that little bit of a block for the rig to come back to work. But certainly in a strong market, we would be prepared to do that. But again, I don't -- although we would bring it back at a point in time at which we would seek some profitability, most of that profitability would be recovering the survey costs. So I don't think it has a big bottom-line impact if we brought that back in any -- in the year that we did it.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay. And can you kind of comment on the -- maybe the floater side of the Asia Pacific market. I believe you guys have the General that's out there that's being actively marketed. And then you have a couple of other cold stacked rigs there. Are you seeing pretty good prospects for bringing any -- getting any of those rigs to work?

Michael D. Acuff

In particular, on the General, we do see prospects. We're actually in discussions at the moment on a couple of different opportunities with the General. We've kind of got a short gap window here that we're summing off survey before we would have the opportunity to start a job. But we see demand for the General and believe it's short term. The short-term period will work into longer contract. So we're seeing in General, 12 months to a year is kind of the term we're talking about for contracting in Southeast Asia right now for rigs for the General.

Operator

Your next question comes from the line of David Smith with Johnson Rice.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Sorry if I missed this early, I got disconnected for a couple of minutes. I just wanted to confirm that the total drilling cost guidance of $1.65 billion, if that did include surveys and mobilizations?

Gary T. Krenek

Yes, it did. That's all-in.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Perfect. Quick question about a couple of the dayrates in the fleet status report. On the Ocean Confidence, was that $390,000 a day a clean rate for the asset or were there any mitigating factors that maybe caused a little discount versus the recent high 400 to mid-400 we've seen for 10,000-foot BP rigs.

Michael D. Acuff

Yes, David, on the Confidence, one of the things I think you -- that happens in our business sometimes is you'll make a deal and then it takes some time to work through the details of the contract in order to finalize it. And that's what happened in this scenario. This rate is several months old. It was where we're working with a customer to finalize the deal. So I wouldn't take that as an indication of where we think the market is in particular, definitely not in West Africa. So it's just something that happens in our business sometimes as a matter of process. And so that's what happened when we finalized it then. This was the next opportunity to announce it.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Makes perfect sense. That's good color. And on the Rover, are the 3 remaining priced options also at 285 a day?

Michael D. Acuff

The Rover has firm commitments that we recently signed at 600 days -- I'm sorry, did you say Endeavor? Are you speaking about the Endeavor?

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Oh, I'm sorry, I misidentified that rig. Right. We saw that the 4-month extension at $285,000 a day, and there's 2 more priced options. I just wanted to confirm if those were at $285,000.

Lawrence R. Dickerson

Yes, and that was -- again, to make commentary on that, that was part of the agreement we reached to get the Endeavor out of the Gulf of Mexico. It was working in the Gulf of Mexico at a rate similar to that. And so we -- our big concern was to get it out, keep it working, and that was a position that we -- the market sort of forced us to take. Under normal circumstances, we would not price an option that far into the future.

Operator

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

G. Scott Burk - Canaccord Genuity, Research Division

Gary, I wanted to ask you on the expense front, if all the rigs were active and you had apples-to-apples comparison, what would be your average cost inflation for 2012?

Gary T. Krenek

Somewhere in the mid- to upper-single digits probably.

G. Scott Burk - Canaccord Genuity, Research Division

Okay, all right. That's helpful. And I wanted to ask you questions on a couple of rigs. The Ocean Confidence with Murphy, what are your expectations for when that rig can move actually to Gulf of Mexico and start that $500 and $12,000 day rate. Would you expect that kind of at the end of the most recent extension through January 2013?

Gary T. Krenek

That's really Murphy's call on their confidence on the permitting situation. And you hear some companies are very bullish on the permits section application, and other companies are a little bit more cautious. It depends on where their prospects are, so we can't really comment on that. Certainly, that remains the intent for Murphy to bring that back. We should work through most of our commitments at these lower dayrates sometime later in the year. And so we would be looking in one market or the other to be moving up towards market with that vessel.

G. Scott Burk - Canaccord Genuity, Research Division

So the implication is -- can you remind me what you're commitments are? So just have to commit into that dayrate through the end of 2012 at all?

Gary T. Krenek

Yes, towards the end of 2012.

G. Scott Burk - Canaccord Genuity, Research Division

Okay, okay. And then the other one I wanted ask you about was the Heritage, which moved to warm stacked from being actually marketed. Do you have any expectations for -- of a higher time there, and does it need yardwork before you'd put it back on another contract?

Lawrence R. Dickerson

No, the Heritage has recently completed its survey, so it's good to go on a go-forward basis.

G. Scott Burk - Canaccord Genuity, Research Division

And so should we assume like just 1 month or 2 downtime or perhaps more than that?

Lawrence R. Dickerson

Well, any down time we took would be if -- relocating it to a different market, and so it'd be just mobilization time.

Michael D. Acuff

We continue to evaluate the opportunities with Heritage, and we'll see going forward.

G. Scott Burk - Canaccord Genuity, Research Division

Okay. And then I wanted ask you kind of a broader question on the Macondo court cases. It just had a couple of rulings that seem to be favorable for the industry. I just wondered what your thoughts were in terms of the rulings there and if it strengthens or weakens the indemnity clauses that you have in drilling contracts?

Lawrence R. Dickerson

I can't really speak to legal issues other than my understanding was an affirmation of the contracts that were negotiated between the operator and the contractor. And we believe very much in the contracts that when you conduct business, you set parameters that obviously can take one thing or another. And we were glad to see the court will leave that in place. So that's a good thing for all of business, I would say, not just drilling contractors or the energy business.

Operator

Your final question comes from the line of Andreas Stubsrud with Pareto Securities.

Andreas Stubsrud - Pareto Securities AS, Research Division

Actually, one of my questions were partly answered. I was wondering how you were thinking about the jack-ups that actually have left some -- or have negative operating income before CapEx, obviously, and taxes, et cetera have negative operating income, the whole jack-up fleet. And how you're thinking about that in the future compared to what you just did with Ocean Voyager, were you actually are taking it from a low-end markets to a higher-end market? It's a little bit more difficult, of course, in the jack-up market. But your long term views on kind of this type of fleet?

Lawrence R. Dickerson

We certainly had different opportunities available to us in the floater area. We've got other cold stacked rigs that we don't necessarily see a way to upgrade this. The Onyx was based upon a vessel that had some inherent strength that enabled us to deliver new capacity into the fourth-gen market. And at jack-ups, we went to a program several years ago where we upped water depths by adding legs and adding mud pumps and whatnot. And generally, that fleet is at its practical capacity. Because beyond, as you start adding power, which requires space, which requires -- takes your deck load down, and it's just not the room to be able to upgrade those rigs cost effectively. So we are continuing. We've got a stronger market. We've got rigs down in Mexico. So we're working very hard to up the contributions they make, but this remains primarily a floater company. And that's the way we see it going forward.

Andreas Stubsrud - Pareto Securities AS, Research Division

Okay. And just a quick follow-up. Do you think it will be a trend what you do with Voyager in the market in general or in the industry? Because like you're saying, the fourth-generation market looks quite good, especially in Africa and other places, while the low end and middle market looks to be more replaced by both new boats and other units. Do you think this is going to be an industry trend or do you think there's only going to be some one-offs like the one you're doing?

Lawrence R. Dickerson

Well, I mean, each owner of the rig will make his own assessment. But certainly, we've seen that if you don't have an appropriate vessel to apply in your program around, that you run the risk of really spending a lot of money. We sold the Ocean Liberator to another contractor who did what was in our judgment was not a cost-effective upgrade because the cost just kept spiraling out. Certainly, what Diamond has done in the past has worked really well. I would say Noble has done some good jobs with some of their vessels. But I think, in general, there's limited number of appropriate vessels to be worked on, on a go-forward basis. So my expectation would be that the -- there would be few units that you would see come into the market as a fourth-gen type capacity.

Andreas Stubsrud - Pareto Securities AS, Research Division

Okay. And just the last one, are you able to inform us what the Ocean Voyager book value was before you were doing this upgrade?

Lawrence R. Dickerson

It was minimal simply because that rig was acquired as part of the ODECO acquisition in 1992, so it has been very much depreciated.

Okay. We thank everybody for joining us. We had some good questions, and we're looking forward to next quarter and hope to have some dayrates to get you excited about. Thank you.

Operator

This concludes today's Diamond Offshore Drilling Fourth Quarter 2011 Results Conference Call. You may now disconnect.

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