Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Darren Daugherty

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

Michael D. Acuff - Senior Vice President of Contracts and Marketing

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

Analysts

Robin E. Shoemaker - Citigroup Inc, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

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

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

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Trey Cowan - Clarkson Capital Markets, Research Division

Diamond Offshore Drilling (DO) Q2 2012 Earnings Call July 19, 2012 10:00 AM ET

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 Second Quarter 2012 Earnings Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Darren Daugherty to begin. Please go ahead.

Darren Daugherty

Thank you, operator. 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, Senior 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 factors, 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. We ask that you please limit it to 1 question and a follow-up so that we can open the floor to as many people as possible.

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

Lawrence R. Dickerson

Thank you, and welcome again to everyone for joining us. We were very pleased, obviously, with the results that we reported for the quarter. And I will start by making some comments on the operating results and some of our future dayrates. So I'll be followed by Michael Acuff who will elaborate more on markets around the world in an opening statement. And then Gary Krenek, who's our CFO, will make some further commentary on the numbers that are in this quarter and how those may impact us on a go-forward basis.

First, on the operations, removing the items related to the sale of the jack-ups, we still substantially performed above our budget and the average industry consensus. And one thing I'd like to comment on there, we've got lots of initiatives ongoing that have been in place for a long time and some of those really were approved in this quarter, particularly efforts to reduce unplanned downtime.

We came in at 60 days of unplanned downtime. In other words, things that result from equipment breaking or being taken offline, where the rig has to suspend the operations during the quarter -- the past 2 quarters. And on a budgetary basis, we have experienced in the 140-day range and that's what we set as our budget for the year. We have previously performed better than that. We did a 110 days, I think, at end of last year. And we were in the 60s if you go back several years. But we were very pleased with that. And that's a reflection of our preventive maintenance program and the amount of spares that we have so that if equipment fails, we're able to very rapidly get that replaced.

And I'll just give you an example that's happened here right at the beginning of July. It wasn't in the quarter, but it's typical. On one of our rigs, during a routine maintenance inspection, one of our employees noted that some shivs [ph] on the [indiscernible] compensator on a big rig appeared to have a crack. And I've seen photographs of what he looked at. And given the condition with grease and sea spray and all kind of things on it, it was really a tremendous catch. The rig was able to obviously -- again on top of this, instead of having a catastrophic failure, that could have had a -- been down for a longer period of time, but could have potential for injuries. We're able to get -- plan what we're going to do. Our initial plan was it may take 4 days, but due to the competency of our crews and great planning, they were able to execute this change in under 55 hours.

So those are the kind of efforts that are going on all of the time out there. And if you think about the difference between 140 days of downtime and 60 days of downtime, that 80 days of savings, if our average rate were at $300,000, that's $24 million in a quarter or about $0.12 to $0.13 that we would save as a result of that. So we're not always going to be able to achieve that, but we're certainly working hard to do that.

Additionally, our operating expenses were within or below budget across-the-board. Again, we're planning, making sure that we've got everything maintained, in great shape, gives you the opportunity to deliver those kind of numbers.

Moving beyond that and looking at the contracts that we announced, obviously, the Ocean Onyx, we were very pleased. We've worked for some time with Apache in -- a great customer. We enjoy working for them. The Onyx will be working in the Gulf of Mexico. So work is being done on that rig in Brownsville, so that it will be delivered and we will not have a long mobe with off time to get it to mid-water markets. And we're pleased with that.

And again, this reflects our faith in the deepwater market and particularly, in a [indiscernible] solution, which is not always a [indiscernible] solution, but there a number of places where this plays out very well. Recently, we had announced the Ocean Victory, a little bit lesser capacity rig. It signed a job at $420 million. So this is a nice follow-on at these rates.

And I'll remind everybody that our cost of delivering this kind of capacity on Ocean Onyx is $300 million versus our newbuilds, and we're pursuing those projects as well nearer the $650 million rate. And the newbuilds -- we've seen some higher, higher dayrate recently obviously [indiscernible] but there, you're spending half of capital to deliver that. And our operating costs were greatly reduced on the Ocean Onyx because of the more simplistic design, yet it is still able to deliver the capability that's out there that's demanded by our customers. And there's very little competition in this space to be able to deliver rigs of this nature. In fact, we only have 1 more Victory-class rig in [indiscernible] the Ocean Bounty. That's located -- cold stacked in Singapore. And we are in the process of completing final engineering so that we may proceed further with a similar project on that particular rig.

And then next, we announced 3 big contracts in the North Sea. And I think Michael will be covering a lot of the deepwater market. But I would just say that this is reflective of an [indiscernible] a very strong market today. I don't know -- it wasn't too much long ago that the North Sea was generally condemned, and majors are moving out of there as those don't have a [indiscernible] future. Yet, we see this again and again in provinces that become re-energized based upon not only market conditions but new technologies that come out that enable our customers to make use of quicker ways to bring product onstream. There's a Brent premium right now. There has been for some time, and that makes the [indiscernible] work very well. It's very close to infrastructure. The drilling is not at great depths. You do have weather issues. But beyond that, it's a great area to drill in. And it's been a province of independence. We [indiscernible] Petroleum is our customer on the Ocean Nomad. Our Ocean Princess is working right now. It continues to work for Enquest. But we've seen Shell come forward. Shell is very active and already have the Ocean Guardian on a 2-year contract. And yet, as they look now on the road, they elected to add a third year on that contract to $350 million. And as the Vanguard, which is in Norway with Statoil, we got a 20-month extension, as we noted, and a nice increase.

So all of that being said, there's continued opportunities for our customers to explore and bring on production in mid-waters in the North Sea, both Norway and U.K. And it's a market where there's not a lot of new capacity or any capacity being brought on. It's a market where there's barriers to bringing rigs in. So it's very strong there. And I'll let Michael make any further comments on North Sea and also how that impacts worldwide.

The last thing I'll talk about here is the sale of jack-ups. We sold the Ocean Sovereign here in the quarter. And on top of the other jack-ups that we've sold, we continued to remove some of the older lesser capacity jack-ups from our fleet. I would say we have -- our focus is on ultra-deep, deep and mid-water units. And we continue to market those rigs around the world. We have a core of high-capacity jack-ups that are in Mexico, and we are planning to continue that. But the rest of our rigs, which are right now scattered around the world, jack-ups in 1 or 2 in different markets, we have been actively moving to sell those. And the market is such that we're able to bid those right now. So again, a very pleasing quarter for us.

Michael, do you want to expand on the market?

Michael D. Acuff

Sure. Thank you, Larry. Looking at the market, starting with ultra-deepwater segment. The ultra-deepwater market remains robust. We got -- seen demand continuing to materialize in the Gulf of Mexico, West Africa and East Africa.

[Audio Gap]

Again, we're very positive on the ultra-deepwater market with significant data points being developed every day.

Lawrence R. Dickerson

Okay. Operator?

Operator

Yes, sir, I'm here.

Lawrence R. Dickerson

We're being told we're getting calls in but no one's hearing us.

[Technical Difficulty]

Are we in now? Okay. I am going to just start over briefly. I don't know where we were cut off. And I apologize, but I've been told that for some time, they were all broadcast.

Unknown Executive

You always have one line that we heard now [ph].

Lawrence R. Dickerson

Okay. So I'm being told that my statement was heard, and we'll start over with the marketing report from Michael Acuff.

Michael D. Acuff

All right. Take 2. Okay. Now, looking at the market -- we'll start with the ultra-deepwater segment. The ultra-deepwater market remains robust, and we continue to see demand materialize in the Gulf of Mexico, West Africa and East Africa. We expect, certainly, new contract announcements here in the near term and in the next few months, possibly occupying up to 10 rigs in this segment. And with this, we believe now that 2013 is close to being sold-out and expect demand to continue to materialize into 2014, looking at the availability of rigs in that timeframe.

An example of this, there are multiple tenders out right now outstanding that could take an additional 5 rigs off the market in 2014, and we continue to see this come on as we go forward and expect more in the near future.

With respect to pricing, the recent announcements by some of our competitors clearly show that the market is now in the high 500s for 3- to 5-year term work. And we don't expect this to change as we go throughout the remainder of this year. Looking at the deepwater segment, it continues to be strong with the Gulf of Mexico and Africa, West Africa leading the demand. The recent Central U.S. Gulf of Mexico lease sale highlights the increased activity that we think is coming into the ultra-deepwater and deepwater market in the Gulf of Mexico where sales generated approximately $1.7 billion in winning bids. So it's a bright future, we believe, for the Gulf.

Dayrates continue to increase with leading-edge rates in the high 400s to low 500s as seen with the rigs and fixtures including the Onyx. And finally, we don't see any new supply coming into this segment, other than what we've added recently with the Onyx and potentially the other rig Larry mentioned. So we continue to see this to be a tight market going forward and look positively on it.

Turning to the mid-water, this market is operating really as 2 distinct segments at the moment. You've got the very strong U.K. and Norwegian North Sea market that Larry mentioned. And then you got a steady to slightly increasing market in the remaining international segment or geographic regions.

As you can see from the extensions that we've recently announced yesterday, we're taking rigs now into 2015 and the resulting dayrates are continuing to increase. So the U.K. and North Sea and Norway is leading the charge, and we don't see a real visible end to this demand as we have customers continue to request rig time going forward.

In essence, 2013 in the North Sea is sold-out now. And like I say, we continue to have discussions, so we'll see how those develop and what capacity is available for them.

Looking at the Gulf of Mexico and other international locations in the mid-water market. And it continues to be a steady and slightly increasing market. We produced -- we continue to see additional demand coming online typically in the 6- to 9-month range with a bit of pricing power as we go forward but a very steady market at the moment.

So one of the things we wanted to address in this call was to look at our mid-water fleet and how we see it going through the regions going forward. Of course, I discussed the North Sea where we had 4 units or 25% of our fleet in this very strong market. We have 5 additional units with Petrobras and PEMEX, and they continue to utilize those with contracts out until late 2014 and 2015. Of course, there's been some news recently with OGX out of Brazil. I will speak there are 3 mid-water units currently under contract. The Ambassador is contracted until September of 2012; the Ocean Lexington, which is currently contracted until February of 2013; and the Ocean Quest under contract until the end of 2013.

Based on our conversations with OGX, we're currently discussing follow-on work for the Ambassador with other customers, assuming the rig will be released in September of this year. We also believe that they will re-lease the Lexington at the end of the contract in February 2013 and are already working on a follow-on term contract in direct continuation of that.

We are encouraged by both of these discussions, and we'll continue to update you as things develop. Finally, the Quest has approximately 18 months left on its contract, and we're comfortable with the rig's position with OGX there.

Turning to the Gulf of Mexico, the Saratoga recently finished its contract with Nexen. And it's currently hot stacked, awaiting its next contract. We believe the next contract will commence towards the end of the summer and should provide a steady stream of term work into 2013.

In Asia, we announced new contracts on both the Patriot and General. This should keep them utilized into the first quarter of 2013 and are already seeing other operators line up to secure rig time behind these contracts. So with these rigs utilized or anticipating contracts, as I mentioned, that really only leaves the Ocean Whittington, which is currently undergoing evaluation to estimate the requirements for that rig to return to work.

So in summary, of our 16 mid-water units in our fleet, 4 are exposed to very strong North Sea market and has significant term contracts; 5 are on long-term contracts with NOCs; and the remaining 6 are finding steady 6- to 9-month jobs with continued exposure to the increased pricing in the market as it improves.

Again, that only leaves the Whittington. And I think -- so you can see why we're pretty comfortable with our mid-water portfolio position and the cash flow stream that it produces.

With that summary of my market, Gary?

Gary T. Krenek

Okay. Thanks, Michael. As always, I'll make a few comments on this past quarter, and we'll turn to what to expect in Q3 and Q4 and the remainder of this year. Looking at our results for the second quarter, we reported after-tax net income of $201 million or $1.45 a share. That's up slightly from our Q1 report of $185 million after-tax income or $1.33 per share.

We did that despite contract drilling revenues decreasing from Q1 of $755 million to $726 million in Q2. The decrease in revenues was driven by the fact that we have 5 rigs down for special surveys in Q2, just as we had forecasted in our last conference call and reflected in our rig status report. This is versus only 1 down in the first quarter. This reduction in revenue was mitigated by the very good unplanned downtime that Larry talked about in his opening statement. And that [indiscernible] helped offset downtime for the special surveys that we had.

As pointed out in the press release, we have 2 significant items outside of revenues that affected our earnings. Again, we have 5 jack-ups that we reported sold during the quarter: the Sovereign, the Heritage and 3 of our mat jack-ups. These -- the sale of these jack-ups resulted in about $15.5 million worth of gain or $0.36 per share after tax.

The bulk gains reported on 2 of these rigs, the Sovereign and the Heritage, which was a vast majority of the total gain of $50 million, had no current tax expense associated with them. The result of them being owned by non-U.S. subsidiaries, in which profits are indefinitely reinvested, and thus not subject to the current U.S. taxes. In other words, we had a 0 tax rate on the gains on these rigs.

Which brings us to our second significant item in our income statement, our Q2 tax rate of 18.4%. The 18.4% was driven by a couple of items. One, just normal geography changes in our estimated earnings in the year between domestic and international as we always had. Also, the treatment from a tax standpoint for -- of capitalized interest that we recorded on the Ocean Blackline [ph], which we announced in the second quarter. These 2 had small effects on our tax rate, dropping it slightly. But primarily, the factoring in of the additional $50 million a gain on the Sovereign and the Heritage was 0 tax rate. It was the main reason that the tax rate was driven down as far as it was.

These 3 items will also affect the ongoing tax rate for the remainder of the year, and I'll talk about that in a second. Looking at some of the specific line items on our income statement in Q2, contract drilling expense, we had guidance of $415 million, $430 million; and we actually came in at $405 million.

Several reasons for this: One, we thought we were going to begin a survey on the Whittington in Q2. We did not begin that work. We're still assessing the condition in that rig, as Michael talked about. And we also benefited from the strengthening of the U.S. dollar. These 2 items would have brought us up close to the low-end of our guidance, maybe just slightly below. The rest of the favorable variance on our contract drilling expense due, as Larry said, to our concentrating on cost control out there on the rigs and also the reduced unplanned downtime. Less unplanned downtime means less broken equipment, plus repairs. And that benefited us not only on the revenue side but here on the cost side.

Looking at a few of the other line items, G&A was $18.7 million, which was within our guidance. Depreciation was just slightly below what we guided to and that was driven by the sale of the Sovereign and the impact of spending depreciation on that rig. Interest was lower. We had guided $15 million and actually came in at $12.7 million. This again is attributable to capitalized interest on the Ocean black line and deposit. And finally, of course, the tax rate was substantially lower.

Other than gain on sale of assets on the income statement, there was nothing really on the income statement of note. Looking forward to the third quarter, one of the main drivers again will be downtime to the rig surveys. As we've been saying for some time now, both 2012 and 2013 are going to be heavy survey years for us. So this should come as no surprise what we've reported in the rig status report.

In the third quarter, we're anticipating that 6 rigs will be down for survey, 3 of them will begin in their surveys in the quarter; 3 others were actually participating in surveys at Q2 ended and then will complete their surveys in the third quarter. In addition, the Ocean Summit, our jack-up down in Mexico, will be down for about 60 days doing some planned repairs and also some modifications required by PEMEX contract.

A couple other rigs with scheduled downtime and again, I refer you to the rig status report for details on exactly what rig and what timing those will occur. This downtime, of course, will affect both revenues and cost in Q3.

Getting down to some of the specifics, contract drilling expense, we will again incur the normal daily operating cost by rig type and region that we gave out earlier in the year. In addition, the 6 rigs in the shipyard for survey, each survey will run somewhere between $3 million and $10 million of additional cost and will add about $25 million to $30 million for our total cost. We will also incur an additional about $12 million of amortized mobe cost. And again, these amortized mobe costs will be offset almost dollar-for-dollar by amortized mobe revenues.

If you add all of that up, we expect contract drilling expense for the third quarter to be somewhere between $410 million to $425 million. Again, I remind everybody that this $410 million to $425 million is for contract drilling expenses only. Reimbursable costs are not included in the amount I just gave you. If you look at those 2 together, you can just add another $10 million to $15 million worth of reimbursable costs, which will be offset also almost dollar-for-dollar by reimbursable revenues.

The other line item, G&A remains the same. Guidance, as before, is $17 million to $19 million a quarter. Depreciation, slightly lower guidance, down to $99 million to $101 million per quarter both for Q3 and Q4. And interest expense, we now believe, of the $22 million worth of gross interest expense will capitalize about $10 million in Q3 and Q4, which will leave us a net of about $11 million worth of expense. This again is an increased -- or the expenses decreased because of black line [ph]. The effective tax rate, we believe, will now, for Q3 and Q4, be somewhere between 22% and 25%. This reduction from prior guidance is a result of accounting rules, which has you spread of the 0 tax rate that was recorded on the sale of the jack-ups, not just in the quarter that occurred but you spread that over -- equally over all 4 quarters in the year. So again, 22% to 25% going forward.

And finally, capital expenditures, we now believe maintenance capital will be somewhere in the $320 million range. And our new-build, because of the black line [ph] and the Onyx, will be somewhere around $400 million for the year ended 2012, which gives us a total of $720 million.

One other item I'd like to mention before turning it back to Larry. For those who may have missed it, during the quarter, our credit rating was upgraded by Moody's to A3. This rating brings us in line with our Standard & Poor's rating of A- we've had for some time now. With this upgrade, Diamond Offshore is now the only contract driller with an A3 or an A- rating in our industry, a reflection of the solid balance sheet and strong financial profile.

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

Lawrence R. Dickerson

Okay. So we're ready for questions.

Darren Daugherty

Operator, we'll open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask about the -- your comment on the mid-water market, very strong in the North Sea and kind of steady elsewhere. So kind of what does that imply then for the Ambassador and Lexington, which you expect to have available now later this year? I didn't quite -- you said you're looking at various market opportunities for that -- those types of rigs, but is there a need to upgrade significantly if they work outside of Brazil?

Lawrence R. Dickerson

No, I think the North Sea has some unique attributes, which is -- it's been moving -- that market has been moving for some time. And I think that the rest of the world is at an earlier stage. There's still, by and large, pricing off the Brent model, so you've got a nice income stream. And there are so many different markets, so you're not always -- whereas [ph] the infrastructure, but we're certainly seeing a lot of interest around the world. And I think Michael is just cautioning that, at this stage, we can anticipate increasing dayrate but it would -- if the market is not set up as strong as the North Sea. We want to make sure everybody was aware of that.

Michael D. Acuff

And, Robin, to your point on the Ambassador and the Lexington, we don't see a requirement to upgrade the rigs for the jobs that we're discussing at the moment. So we see the rigs as is, as being a marketable asset with interest from several customers.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. Good. So let's see -- so while we're on the topic of Brazil, how do you see the demand for rigs over the next year? I mean, clearly, you've got a couple of ultra-deepwater rigs yet to be -- for '14 availability. Is that a market that you're looking at for those rigs, or is it largely elsewhere?

Lawrence R. Dickerson

Well, we've had a huge position down in Brazil, and we expect to continue that. And we enjoyed servicing both those customers there. But all things being equal, for diversification reasons, we would prefer to have those rigs, I believe, working in other markets just to spread things around the world. When we bought Valor and Courage in 2009, we put both of those in Brazil. So I think that's got some high-end assets there. And with that, we'd like to see those rigs work elsewhere.

Operator

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

Ian Macpherson - Simmons & Company International, Research Division

Larry, you mentioned that you're completing your engineering study on the Bounty. But certainly, the contract that you've got for the Onyx makes that project look like a no-brainer, assuming there's nothing fatally wrong with the whole. So correct me if I'm wrong there, and what do you think your turnaround time would be for getting that rig delivered if you're able to move as quickly as you would like to?

Lawrence R. Dickerson

I think we would be -- we would likely be doing that work in Singapore, where they are much more active. When we are able to get the Onyx into Brownsville, there wasn't a lot of competition. So I think we've got a great schedule there at 18 months. So we would be between 18 months and 2 years, I suspect, to deliver out of Singapore.

Ian Macpherson - Simmons & Company International, Research Division

Okay. And do you think that you could be kicking this off by the fourth quarter of this year?

Lawrence R. Dickerson

So we're pretty advanced on engineering. And so it would be really coming down now to contract terms if we would be able to develop between various shipyards. But I would say -- I mean, the thing is certainly advanced, I can't tell you there's a bunch of hurdles left to go but we're not ready to say we're pulling the trigger on it.

Ian Macpherson - Simmons & Company International, Research Division

Okay. You've had some good success with your jack-up sales. Are you still looking to prune those leaks with jack-ups or mid-water rigs? Or do you think that you're more or less finished with that aspect of fleet renewal for the time being?

Lawrence R. Dickerson

Well, we said on the sales front that our core jack-ups are all located in Mexico. Conceivably, we could bring the team into Mexico. But the other rigs that we've got there, we would continue to look to sell those and really trying to go on a go-forward basis to be looking at operating a worldwide semi-fleet and operating 4 to 5 jack-ups in Mexico. It certainly move somewhere else. But for -- right now, that's -- I mean, we see our fleet are going forward, and we could conceivably sell. We've got a couple of cold stacked semis and some of those could be sold.

Ian Macpherson - Simmons & Company International, Research Division

Okay. Michael, did you comment on the near-term outlook for the Saratoga and when that rig might get a contract either this summer or this autumn potentially?

Michael D. Acuff

Yes, no idea. What we're looking at, Ian, is probably late summer, early autumn. Of course, hurricane season in the Gulf has a little bit of an effect. But we're in discussions now, and we think that'll materialize fairly soon and we'll keep you updated on that.

Operator

Your next question comes from the line of Kurt Hallead of RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I just have quite a follow-up on Larry, Ian and Gary, you guys mentioned the focus on unplanned -- on bringing down the unplanned downtime, obviously, you've done a great job with that, so kudos on that front. I'm just trying to get a better understanding, though. You've referenced something about planning for what -- I think you said 140 days per year. And now you can -- you ran less than that last year at one time, the obvious hiccup...

Lawrence R. Dickerson

140 days was the quarterly amount of downtime that we ran from the past 3 quarters. When we sat down and did our budget, we projected that we would run a 140 days per quarter of unplanned downtime.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. All right. Great. That clarifies that. I appreciate that. The second question I have for you on the OGX rates. It looks like they're going to become available to the marketplace. Do you expect that you're going to need to do any work on those rigs in transition -- to transition them, it sounds like out of Brazil into other markets. How should we be thinking about that transition period?

Michael D. Acuff

In general, we shouldn't have to do major work. The contracts or the discussions we're having on the Lexington wouldn't require anything significant. When we look at the Ambassador, it depends on where that rig goes to. If it goes to international standard market, we wouldn't expect any major out of service or uprate time. If it goes to, say, Mexico, you have to do some work that prepares the rig for that particular market and the contract requirements. So, in general, we're not expecting major out-of-service time on it for upgrades. But again, it's a bit customer and market-dependent on where it ends up.

Lawrence R. Dickerson

So the one factor I'd point is that Brazil is our highest cost market, except for Norway. And so even if dayrates were even flat to relocate to Mexico, which we did recently with the Yorktown, we picked up a significant amount of savings on cost line that gave us a net of -- I mean, certainly an improved margin on the same dayrate.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. Great. The last follow-up I would have for you is that you've got the -- Diamond is in a situation where you've gone -- you're trying to maintain balance between obtaining kind of dividend yield that a lot of investors have become accustomed to expect, and at the same time, trying to renew your fleet. Can you just give us an update on how you're looking at that balancing act as we head out into 2013?

Gary T. Krenek

Well, they're clearly both important to us. And to-date, we've got 5 major projects underway before [indiscernible] oil ships and the Onyx. If we added the Bounty to the mix, then that would be 6 major projects. I think the ratings upgrade that Moody's gave us was based in part on our very low leverage level. We think that if we need to, we can leverage to maintain our fleet reinvestment and this cash flows that were reflected on the contracts that we announced today, which were in the range of $800 million of future cash flow. And of course, that won't kick in for a while. But all that show that there's adequate cash flows to continue dividends at this current level, although we set them at each quarter.

Operator

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

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

Just to follow up on the prior question. Could you remind us how much of your cash balance or marketable securities is held in U.S. cash versus foreign cash? And just if you see in the foreseeable future a repatriating event in order to sustain the dividend?

Gary T. Krenek

Our domestic cash balance is fine. We've run projections, and we don't see a problem with that for several years at a very minimum. Remember, the much of the new-build program is being done as part of our international portion of our business. And therefore, that's where earnings that are coming from the international part are going to. So that's not an issue for us.

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

Okay. I just wanted to clarify on that. And then my other somewhat nitpicky question. You mentioned that currency exposure was a little bit of a variance in the OpEx versus what your guidance was. I was wondering if you could give us a little bit more color in terms of maybe the magnitude and also how that -- how currency kind of flows through the cost line? Specifically, what currencies may be affected?

Gary T. Krenek

What -- I'm sorry, what currencies would be affected?

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

Right. Was it the U.S. versus the Brazilian real, or is it more the U.K. rigs that saw a cost or currency fluctuation?

Gary T. Krenek

It was across-the-board. The amount came to $4 million or $5 million, so it was not a significant amount. But you couple that with other things in order to get to where our guidance was. And it was across-the-board. It was not isolated to 1 currency.

Operator

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

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

With '12 and '13 being heavy survey years, is there any risk that some of those rigs don't go back to work after the surveys, or is the outlook fairly positive for most of those?

Lawrence R. Dickerson

We generally would do not do a survey unless we were very confident that the rig would go back to work.

Operator

Your next question comes from the line of Darren Gacicia of Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Kind of a follow-up on Kurt's query. Is it -- if you look at it and you look at it with the new-build program, timing could be a little bit fluctuating between when it hits. But you have some financing needs and you have to kind of balance that against the dividends. So I guess, my question as it goes especially as I talked to clients and hear some pushback on the name is, what is sort of the level -- especially given your comments around the credit rating, you're willing to take leverage, and are we willing to sit there and build leverage at the same time as raising dividend? Is that something that's a no-no? Is that kind of a nonstarter? Or is that something that earnings grow, dividends should grow and just in the near term, your willingness to raise debt levels as a percentage of capital?

Gary T. Krenek

Well, did we -- we're not -- we can't give guidance on what our future dividends would be. But I guess, I would state that dividends are very important to us. If you understand our capital structure and investment -- who our investors are, you can really understand it that we believe strongly in dividends. In the last cycle, we raised dividends fairly aggressively but we did not have the new-build and fleet renewal programs going on that we do now. So obviously that year - everybody's correct to see that it was a factor. And as you know, it is a balancing act. But other than that, I can't give you any future guidance. The yield that's present right now on an annual run rate with our special dividend is very, very attractive.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Certainly. And maybe to kind of ask it in a slightly different way, then, to try and to kind of get the parameters, is there kind of a base cash level that you'd like to maintain? And just more specifically with regard to debt ratios and your credit rating, is there a parameter, which you'd worry about that levels would go above, and you'd worry about that rating?

Lawrence R. Dickerson

Obviously, that gets out of hand when you worry about the rating. But as Gary noted, we do projections on our fleet renewal and make some assumptions on what we're going to do with that cash. And within the bounds of how we read the market, we don't see anything that would imperil our new-build program, imperil our credit rating or imperil payment of dividends.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got it. Did you -- in terms of credit rating, because I think there's varying opinions across your peers, is there -- I mean, how much a positive impact do you think you'll get out of having a higher rating versus a lower rating in terms of interest costs or expenses?

Lawrence R. Dickerson

I think there'd be some impact, I think it is fairly small, but -- it's the life of a bond, several million dollars.

Gary T. Krenek

Darren, it's Gary. For example, on a 10-year bond, we have been told by the banks that a higher credit rating is worth anywhere from 10 and 20 basis points. So $500 million bond, 10 years, that's up to $10 million over the life of the bond.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Wow. Okay. And if I could just ask one more. In terms of mid-water in the Gulf of Mexico, you've obviously kind of covered in a call where some of the strength has been in the market. I don't know if you really mentioned the Gulf given the kind of probably latent development work there and probably some plugging and abandonment work especially in the mid-water. I mean, is there -- what are we seeing there?

Michael D. Acuff

As we stated earlier with Saratoga, I mean, we see demand coming. You're correct, there's significant amount of P&A work that needs to be done. That fits well with the Saratoga in the Gulf. And we think that this is out in the future. There's several operators that have these programs that they need to do. So that's definitely a source of demand going forward for us in the Gulf as you don't see as much exploration and development work, but the P&A work is, I think, going to be pretty strong going forward.

Operator

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

Trey Cowan - Clarkson Capital Markets, Research Division

Actually, it's Trey filling in for Todd today. Looking at the mid-water floater environment and the opportunity to probably move those rigs, is it more likely that you would want to get those both in the same region, or does that factor into it at this point?

Michael D. Acuff

Really, it doesn't factor into it. We -- you may have a little bit of savings from a shore-based standpoint but not significant enough that it changes your strategy of how you market the rigs. So I wouldn't say that, that plays very much of a role in our decision-making.

Trey Cowan - Clarkson Capital Markets, Research Division

And when you talked about the Gulf of Mexico being probably the better from a marginal standpoint, correct? And that applies to the mid-water too?

Michael D. Acuff

I think I know what you're saying. But like I said, the P&A is a significant part of where we see the mid-water in the Gulf going forward. There is still some exploration work that happens, just not term in basis. It really is based on a term program. So we still see plenty of work for the Saratoga. It's just -- it's not going to be a 3- or 4-year type term environment. It's 9 months, 6 months a year, those types of jobs.

Lawrence R. Dickerson

Let's take one more question.

Operator

Your next question comes from the line of Eric Halgibson [ph] of Prometo [ph].

Unknown Analyst

Yes, you mentioned a possible sale of 2 of your other cold stacked rigs, who will be the buyers for those? And I mean, are there any buyers and what kind of jobs are they looking at, do you think, at the moment?

Lawrence R. Dickerson

Well, I'm reading that the question was, would we sell anything else beyond jack-ups? And I said, "Well, our cold stacked semis will be something we would consider." But I don't -- so beyond that, I don't have any comments on specific buyers or what they would be looking at a rig to use, what type of application they would be looking to use. Did that answer your question, Eric?

Operator

I believe his line was disconnected, sir.

Lawrence R. Dickerson

Okay. All right. Well, thank you very much. We'll talk to everybody at the next conference and/or investor conference that may take place every now and then. Thank you very much.

Operator

Thank you. This concludes today's Diamond Offshore Second Quarter 2012 Earnings Call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Diamond Offshore Drilling Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts