Diamond Offshore Q1'16 Earnings Conference Call: Full Transcript

Operator:

Ladies and gentlemen thank you for standing by and welcome to Diamond Offshore's First Quarter 2016 Earnings Conference Call. All lines are currently muted and after the prepared remarks there will be last question-and-answer session. If you would like to ask a question during the Q&A segment please press star, one on your phone. If your question has been answered you may remove yourself from the queue at any time by pressing the pound key.

I'll now turn the call over Darren Daugherty, Director of Investor Relations. Please go ahead.

 

Darren Daugherty:Director, Investor Relations:

Thank you. Good morning everyone and thank you joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer, Ron Woll, Senior Vice President and Chief Commercial Officer, Gary Krenek, Senior Vice President and Chief Financial Officer and Kelly Youngblood, our incoming Chief Financial Officer.

Following our prepared remarks this morning we will have a question-and-answer session. Before we begin our remarks, I remind you the information reported on this call speaks only as of today and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay of this call.

In addition, certain statements made during this call may be forward-looking in nature. Those statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we are unable to predict or control that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements.

These risks and uncertainties include the risk factors disclosed in our filings with the SEC, including in our 10-K and 10-Q filings. Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today. And please note that the contents of our call today are covered by that disclosure.

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

 

Marc Edwards: President and Chief Executive Officer:

Thank you, Darren. Good morning, everyone, and thank you for joining us for today's call. As Darren mentioned, with us this morning is Kelly Youngblood, who will become our new CFO as of tomorrow. Many of you already know Kelly from his previous 28 year finance career spent in oil field services.

Kelly would bring additional valuable insight as we consider both future strategic options and the efficient deployment of capital and after a very successful 18 years as Diamond's CFO this will Gary's last earnings call. I would like to take a moment thank him for his significant contribution to both the company and to our shareholders and wish him well in retirement. Gary will however continue and consulting capacity as Kelly transitions into the role.

In previous earnings calls I have suggested that capital allocation is one of the most fundamental responsibilities of Diamond Offshore's Executive Team and this focus will not change with Kelly's appointment. Remaining on this subject for a few moments more allow me to make some comments on the subject of equity offering and debt attendance. Although Moody's downgraded the entire Offshore drilling sector during this past quarter. Diamond Offshore retains the highest credit rate in amongst our peers .

The next best offshore driller has rated by Moody's is a full to not just lower, this is not just a reflection of the relative strength of our balance sheet and our liquidity profile, it also takes into account our backlog off late and our operational excellence.

Our recently announced Pressure Control by the Hour Service and outstanding fleet up time are just two examples of what sets Diamond apart. More on both in a moment. But we have looked at debt tenders and concluded that at this time they don't make sense for us. The only bond we have maturing before 2023 is currently rated BBB plus by S&P and it's trading a part value.

We have ample liquidity not only to meet our remaining new build commitment for the already contracted Ocean GreatWhite -- but also to navigate an extended market downturn.

Although we did not transition to Pressure Control by the -- of balance sheet purposes we are also benefiting from the sale of the BOP's on our sixth generation assets for $210 million with a $105 million received in Q1 and the remainder to be received later in the year.

As a result we do not have any current plan to pursue --- nor do we have current plans to initiate an equity offering that ultimately dilutes existing equity holders. So on to the quarter itself, for Q1 of 2016, we reported $0.64 per share on a revenue of $471 million compared to an adjusted $0.50 in Q1 2015, and adjusted $0.89 per share in Q4 2015. Earnings from the quarter benefited from additional revenue related to the of the -- of the Ocean Endeavor one should have completed it's contract in the Black Sea and the favorable tax rate along with strong operational performance across the entire fleet. Unscheduled downtime drops to 1.8% the best quarterly performance we have delivered since 2009.

During the quarter, we saw five rigs finish their term contracts, these been the Ocean BlackRhino, Ocean Endeavor, Ocean Rover, Ocean Onyx, and the Ocean Ambassador.

The Ocean BlackRhino is undergoing certain rig enhancements prior to commencing its three year contacts ahead at the end of this year and the Ocean Ambassador has been sold to scrap. The remaining three of these rigs will be ---- We have also just received notice of cancellation from PAMAX of the Ocean Scepter jaci-up contract resulting in a loss of approximately 1.5 of 1% of our backlog and the above the side we have also had two rigs commence new contracts during this past quarter.

The Ocean Black Lion our fourth and last to be delivered sixth generation drill ship commenced operations working for --- here in the Gulf of Mexico on a full year contract and the Ocean Guardian a third generation asset started it's one year contract in the North Sea with --- Shortly the Ocean Apex a fourth generation assets will commence operations on it's 18 months contract following it's eminent arrival in Australia. The Ocean GreatWhitle Semi remains on track for a delivery from the shipyard in Q3 allowing trying for mobilization and customer acceptance testing, we expect this new harsh environment ultra-deepwater Semi to be on location Offshore South Australia during Q4 to commence its three year contract with BP.

So now let me bring you up to speed on Diamond Offshore's unique and industry first Pressure Control by the Hour service. Since the press release on this new service model at the beginning of February, we have received -- from four of the largest deepwater energy and production companies to include operators with which we are not currently working. We have been commended for the thought leadership that we have brought to the industry along with other initiatives we are sharing with the biggest deepwater players as it relates to innovation and a need to deliver efficiency gains for the deepwater industry. I have already spoken about this particular new model, but since a service went live the two of our newbuild ships here in the Gulf of Mexico we already have an example of how this each model benefits Diamond and our clients.

Just from two weeks following launch of the service, we were unable to achieve a -- during routine operations on the deployed BOP stack of the Ocean BlackHornet. As a result, we had to retrieve the stack from the well head on the Ocean's floor return it to the deck of the vessel and repair the unit before redeployment. The original equipment manufacturers, now has maintenance personnel permanently stationed on the Ocean BlackHornet. Who were intimately involved from the moment we issued first materialize through to resolution and recommencement of operations.

The unplanned stack pull resulted in non-productive time for both our client and us. But for the first time in our industry, the OEM shared in the financial loss. Effectively all parties were truly aligned in addressing the unplanned non-productive time and lessons learned were immediately shared with OEMs design logistics and manufacturing teams. However, this is not only about unplanned downtime, both stakeholders focused on the unplanned aspects of availability.

So when you look at the planned element this is also non-productive time for our clients. We are working with GE to incorporate predictive technology into this service using the industrial intimate along the lines of condition based monitoring and predictive maintenance. By providing an evergreen certification of the BOP system, we are eliminating the need of bring the system in every five years for major over whole.

We are also looking at technologies that have developed around concept of equipment finger printing and acoustic using subsea sensors. Diamond Offshore continues to push out the frontiers of technology leadership in our space. We have recently completed the installation of the heaviest casing run to date in the Golf of Mexico. The Ocean BlackHawk successfully ran complex large diameter casing string with dry weight of over 2.5 million pound to a depth of nearly 25,000 feet.

Put simply our clients -- that are differentiate our service offering as it is relates our sixth generation drill ships. This is especially important as it is this market segment that will likely be the most challenged as the industry the never to recovers. Further building on our thought leadership we have recently negotiate its first right of refusal with our technology partner for the advanced automation of the build flow as it relates to our floating factory concept. It is commonly expected accepted that Robotics have delivered significant efficiency gain to adjacent manufacturing industry and we are continuing to explore ways of transferring this technology to Offshore drilling.

Before I turn the call over to Gary to discuss our financials, let me first return to my earlier commentary. I mentioned the capital allocation is our priority and that my owned and my management team primary objective is to build long-term value for our shareholders. --- it is important for us to consider all available strategic options or a combination of options that enable such, this includes distressed asset purchases amongst others. However not all distressed assets are created equal so we will be selective as opportunities materialize.

Valuation and timing will of course be key. Gary?

 

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

Thanks Mark. As always I'll give a little color on this past quarter results and then cover what's to be expected for the upcoming quarter. For the quarter --- we reported after tax net income of $87 million or $0.64 per share this net income compares to a net loss of $245 million or $0.79 per share reported in the fourth quarter of 2015.

Last quarters loss is primarily driven by an impairment writedown of $499 million which negatively impacted earnings by $2.68 per share. Contract drilling revenues decreased to $100 million quarter-over-quarter from $544 million in Q4 of last year t0 $444 million in Q1, primarily as a result of several rigs that Mark has already mentioned rolling off contracts and failing to find follow-on work. Partially offsetting this decrease was additional revenues recieve from the Ocean Black Lion and Ocean Guardian also which begin term contracts in mid to late Q1. Also impacting operating revenue in the current quarter was the $40 million of --- revenue recognize by the Ocean Endeavor as a result of a current contract in the Black Sea including in January.

With the exception of taxes, the remaining income statement line items for the most part came in within expectations and within the guidance we gave at last quarters conference call. Contract drilling expense of $213 million was at the mid point of our guidance of $205 million to $225 million. Depreciation and interest expense also came in around the mid point while G&A expense of $15.4 million was at the low end but still within the range of our Q1 guidance. The one outliner was in our income tax rate.

Despite, recording pre tax earnings of $83 million for the quarter. We've reported a tax benefit of $4 million in Q1. This compares to our guidance last quarter of a tax rate expense of 10% to 18%. The mechanics behind this anamoly are complicated but the simple explanation is we had operating losses in high tax rate jurisdictions which generated significant tax benefits and operating profits and related tax expense in jurisdictions with lower tax rates, which when combined netted to a tax benefit.

Now looking some of the items that will effect our financial performance in the coming quarter. As I stated in our prior conference call we have no special surveys for rigs in our fleets scheduled for 2016. We do have several rigs that will be moving during the year and we also have some acceptance thing in modifications downtime schedule. A smaller portion which is expected in the second quarter.

For those details I would refer you to our quarterly rigs status report that we filed this morning. We expect rig operating cost for the second quarter as reported in the line contract drilling expense, to decrease quarter-over-quarter for the seventh consecutive quarter and now estimating they come in between $195 and $215 million.

While part of the decrease in this guidance is activity related that also reflects our ongoing efforts to reduce cost while continuing to maintain our rigs for the long-term. As always I remind everyone that I have been talking about the line contract drilling expenses on our income statement which does not include cost incurred in the line reimbursable expenses.

With regards to other items on the income statement, excluding the income tax rate, we are keeping our guidance consistent with what we have said in our prior earnings conference call. Depreciation expense for the full year 2016 still estimated to be in the range $420 to $440 million with Q2 depreciation cost to come in at between $100 and $110 million and then the increase slightly when we begin normal depreciation of the Ocean GreatWhite subsequent to the delivery of the rig from the shift owners.

G&A cost is still expected to total $60 to $80 million for the year with approximately $15 to $20 incurred during each of the quarters of 2016. Interest expense on our current debt and expected borrowings on our bank line of credit, net of capitalize interest is projected to total $105 to $115 million in 2016. Net interest in Q2 should close to $25 million for the quarter and then increase slightly to closer to $27 or $28 million in each of the final two quarters when we no longer capitalize interest on the GreatWhite. As for taxes, we are now expecting a tax rate of less than 10% for all the remaining three quarters of 2016.

Of course this will vary up or down based on any future changes of the geographic mix in the source of earnings as well as tax assessments or settlements or movements in exchange rates.

Moving on to our capital expenditure guidance. That to remains unchanged. Reflecting decrease rig activity we believe that we will incur a maintenance capital cost of approximately $150 million for the full year 2016, which is down from our 2015 maintenance CapEx spend of $215 million. New build CapEx for 2016, is expected to be $525 million which includes over side cost and the final 70% shipyard payments for the GreatWhite.

Adding those together, maintenance and new build capital expenditures are expected to total approximately $675 million in 2016. And finally a word on liquidity, as Marc has pointed out our balance sheet remains in great shape. Our next debt maturities of $500 million and not do until May of 2019.

During the first quarter we were able to pay down our revolver and as of March 31st, we had no short term debt outstanding. However, as Marc has stated we will most likely need drop on that revolver for our final payment on the GreatWhite later this year.

With that I'll turn it back to Marc.

 

Marc Edwards:

Thank you Gary. Although it been of the past few weeks suggest that we may have seen a flow in the price of oil. Our clients are still looking at ways to curtail expenditures and further cut CapEx through the remainder of this year and again into 2017 and this result we have yet see a flow in utilization rates for Offshore rigs. Overall floater utilization has pull on the past quarter another 5% to 62% and were likely continue to fall into next year at least.

With competing six generation asset still could be delivered from shipyards no scrapping to speak out and the fastest declining sub-sector utilization the industries sixth generation fleet is the most distressed of all assets classes. We believe that Diamond is best positioned amongst our peers to ride out this super cycle. Between now and the end of 2019, we are least expose amongst our peers to the over supply of the sixth generation market, we have elevated our drill ships to the top of the daily line of desirability with Pressure Control by the Hour and are able to participate in the mode asset class with solid fourth and fifth generation upgraded assets that we'll see activity return first.

We have already takes difficult decision to retire a large number of assets right size the organization and continue to enhance our brand by focusing on opportunities to drive efficiency gains for our clients.

And so with that let's take some of your questions.

 

Question & Answer

 

 

Operator:

As a reminder ladies and gentlemen if you wish to ask a question simply press star then the number one on your telephone keypad.

Our first question comes from line of Robin Shoemaker of KeyBanc Capital Market.

 

Robin Shoemaker: KeyBanc Capital Market:

Thank you. So one or two startup of asking you. In term -- we see a lot of contract renegotiations and blend and extent type of deals and clearly I mean if you had some ---- you would but I just wonder if what your current thinking is along those lines and with your customers with your key contracts in backlog.

 

Ron Woll:

Robin Good morning this is Ron. The market today I think provides ample incentive for operators to renegotiate contracts and we understand that motivation we do get that . On this side, we do believe even contract ---- where we can customers define mutually agreeable trades that held both parties and as you indicated we are not announce anything new today in that regard. We have done some good work for thsoe customers and make those trades for mutual gains.

I think we've earned the reputation as a partner that help solve the problems while serving kind of both of our shared interest. So we understand that motivation and we certainly have a capacity I think to make those mutually agreeable trades and although nothing as specific to announce today. But there is no doubt Rob the market today certainly motivated customers to look for those trades and gains.

 

Robin Shoemaker:

Okay. Thank you. For me just one another question. You mentioned that there Diamond is capable of making and would be looking at couple of a rig purchases in this downturn as you have in previous downturns and I wonder if you looked closely at the couple of rigs that have sold here in recent months and what your criteria would be and more specifically would you look at perhaps purchasing a high-end deepwater asset that does not have a contract of which would be for which you do not have a contract lined up upon purchasing it.

 

Ron Woll:

Sure Robin. Look, as I mentioned in my prepared remarks we don't see all potentially distressed assets in the same way and specifically as you're referring to the two assets that come to auction, so far not would I would call high expect when lined up against other drillships and whether its the hook-load ---- the capabilities to drill that compensator and even the historical uptime for an asset. One of these assets that came to market had a 19% ----- history of the past three years and a significant amount of that by the way is associated with BP stack. So you have to look at the desirability of the vessels to become available and how they will stack against other vessels buying to contracts in the future that will be coming of contract hard as well as vessels that for example will be better equipped that also have been stack.

First of all, I believe we have to see a flow in utilization of the Offshore fleet, then we have to see the higher end vessels and those that are hard be contacted and this won't happened until first company start to test the ------ your water with the sanctioning of new projects and then even before that we were likely need to see an all --- over $60 and then when you have this cost of stacking and the reactivation cost it should be easy to understand why we here at Diamond do not see any shareholder benefits chasing the low expects generation assets irrespective of the price and I say this is the offshore drilling with the best contracted position on six-gen asset as of course all of mine are contracted out for 2019 beyond at decent day rates.

 

Robin Shoemaker:

Okay, good. Thanks for your explanation.

 

Operator:

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

 

Ian Macpherson:Simmons & Company International:

Thanks. Good morning. I wanted to see if I could dig in a little bit on the Pressure Control by the Hour accounting was there any when you took the first half I guess the first $105 million in sale proceeds in Q1 was there an associated revenue affect with that or was there no effect on the P&L and then just timing on the last two throughout this year and then lastly is the GreatWhite a candidate for a similar program as well?

 

Gary T. Krenek:

Hey, Ian it's Gary. There was no P&L effect on that in the first quarter and actually of course ---- nothing on the P&L. As far as the timing of the next two, we expect one of them at some point in the second quarter probably later part of the second quarter and then the final one early part of the fourth quarter.

So on to the GreatWhite, the I think if you look at the three original equipment manufacturers clearly one of them as we know is prepare to go down this path. The second one, is what a second one that is also prepare to go down this path. But the final company I think is somewhat holding back and that's the company that we have to be from such it relates to the Ocean GreatWhitle. So at this moment in time we don't have any plans to take Ocean GreatWhite down that path.

 

Ian Macpherson:

Okay thanks, thanks Marc. On the Ocean Scepter, is there a dialog to renegotiate a new contract for that rig at a lower price for PAMAX or is it that rig more likely to ---?

 

Ron Woll:

Ian, hi it's Ron. The short answer is really that there is not an active conversation to try to lower that rate and to keep that rig alive. I think we have talked before the PAMAX as unique contractual right with they have exercising on termination does not exist elsewhere and although I think before we would have played I think to try to moves the rigs and around and keeps some rigs alive I think we have acknowledge the market we are in today, we're in Mexico ---- today and I think it's fair to consider that rig will likely I think --- close here so I don't expect any sort of second balance announcement on the Scepter with PAMAX.

 

Ian Macpherson:

Okay thanks Ron.

 

Operator:

Our next question comes from the line of Rob Mackenzie - Iberia Capital.

 

Rob Mackenzie: Iberia Capital:

Great, thanks guys and congratulations Kelly on the new Job.

 

Gary T. Krenek:

Thanks a lot Rob. I appreciate it.

 

Rob Mackenzie:

Following up on the jack-up questions of Scepter would this kind of being your last active jack-up does this mean your guys are looking potentially accept the Jack-up drilling space and or you ---- adding some more asset there later date?

 

Gary T. Krenek:

From a Jack-up perspective the Scepter is a very, very capable unit, so we will be hanging on to it, we wont be exiting the Jack-up space.

 

Rob Mackenzie:

Okay and how do you think about critical math ----. You have the one rig in Mexico the rest of them are cold stacked at this point and largely older assets. You feel you need to bulk up in terms of quality assets there or you happy just running the one unit.

 

Gary T. Krenek:

No I don't think so, I think whether its Jack-up or Floaters, we won't necessarily be bulking up on the jack-up side. I think the jack-up side will end up more distressed than the many of the Floater well the Floater sub-sectors I think the jack-up market will be more distressed. But this is very capable unit and we do see opportunities to bring it back to work as the market turns around.

 

Rob Mackenzie:

Okay thanks and then would you mind updating us on your taking up on the floating factory concept and any customer conversations and where that may stand in terms of building kind of the semi of the future for 2018 or later.

 

Gary T. Krenek:

Sure, there have been two RFIs issued over last few months our requested information as it relates to kind of assets at least two of the larger ---- that considering to let's say have contracted in their split in the 2020 and beyond the time frame. We are not talking about a typical six or seven generation asset. In one case the RFI actually refer to an eighth generation asset.

I believe in term you may have heard for us from us. But of course we are branding it the Floating factory, because that is what it is. As I mentioned Diamond has the --- first light of the --- with our partner from much of the technologies that we see can bring material efficiency gains for our clients and together with these two IRCs, we are performing diligence on that technology and I will stop there I would say no more at this time other than to suggest that from if you look it from a capital allocation perspective it is important as a company with our balance sheet and our liquidity to have a series of options that can be played off against each other, I am not saying that we are going to build the floating factory at this time.

But Kelly and I will be looking to have as many options as possible on the table over the future coming quarters and we will not be declaring on any single one or combination there all at this time surprise to say of that we are we've got some very capable people here in Diamond Offshore who are working very, very hard on the next innovation that can bring efficiency gains to the end user to our client.

 

Rob Mackenzie:

Great answer. Thank you. I will turn it back.

 

Operator:

Our next question comes from the line of James West of Evercore ISI.

 

James West: Evercore ISI:

Good morning guys.

 

Gary T. Krenek:

Hi James.

 

James West:

And Gary congratulation on your comments, I am sure you, you miss talking all and Kelly congratulations on ----

 

Gary T. Krenek:

Thank you, James.

 

James West:

So Marc on the --- factor again concept that we've been talking about for a while and it seems like your ships are little bit something your current rigs and adding new of robotics and that's trying to enhance the capabilities there. Could you maybe describe the detail how you are thinking about the existing assets versus new assets and perhaps how you can take the existing assets to make them into a semi floating factory if you will something like that?

 

Gary T. Krenek:

Sure James. The best solution here when you take look at the floating factory concept is truly to from a white sheet of paper, start from scratch many of the assets that we have got in play right now frankly on shore rigs that have been put on to a ship and if you take a look at the floating factory concept we're looking at lean manufacturing principles apply to every aspect of the deepwater drilling processes.

As we have talk to our partner of choice around these kind of technologies that are also aspects that can be retrofitted on to current assets such as automated slips et cetera, et cetera. But the true efficiency gains for something like the floating factory is when you combined everything together into a seamless processes that can take flat spots out of the drilling process and deliver substantial efficiency gains. As an industry we have survive through continuous innovations and it times like this frankly, where we get our best brands focusing on keeping the cost that would be recost of our commodity as low as possible for our clients and as we talk to many of the larger ISCs they have traction interest in what we are trying to bring to the table. Now I am not going to sit here and say this is a Slamdog as it relates to the capital efficiency moving forward we have a lot of options on this table to include acquisition of distressed assets has to be the right distressed assets at the right time or we are probably one of the few company's now that we blocked up first rather refuse on this technology to consider other things as well that might be out there and like I say this is all about the efficient use of capital and capital allocation moving forward that is in the best interest of my shareholders.

 

James West:

That's right. Okay that makes sense. And then perhaps for Ron, in terms of customer behavior what they are doing with your rigs today that are working is there more of an emphasis on things to enhance recovery ---- tracks that nature rather than making to create new wells have you seen any kind of ----- or ---difference.

 

Ron Woll:

Yes great question, makes a lot of sense. Right now I think as a broad trend with customers we do see them looking for ways to get towards the to squeeze every last drop of productivity out of those assets anywhere they can. So they have settling our I think it's fair to say very focused on getting that maximum value out of our rigs and if that means looking at existing wells sort of more fairly that as a very I think understandable theme and so their approach as each new step with a very I think mindful and somewhat sort of purposeful attitude that may perhaps even in contract to sometime ago. I think the scene here on is real and we do see that because they wanted to be sure from their stand point that they certainly get the best value out of each day on our rigs. So I think that theme is really there.

 

James West:

Okay. Got it. Thanks guys.

 

Operator:

Our next question comes from the line of Greg Lewis of Credit Suisse.

 

Gregory Lewis:Credit Suisse:

Yes, thank you and good morning.

 

Gary T. Krenek:

Good morning Greg.

 

Gregory Lewis:

Gary congratulation we will definitely miss you. Thanks for all your help over the years and Kelly congratulation on the new spot. Ron, I just had a question on it seems like we've heard some noise that Brazil potentially is coming back and looking to renegotiate contracts with service providers. Is that something that that's out there in the market or is it something that at this point it's just more talk than anything else?

 

Ron Woll:

Yes, makes a lot of sense to your question. I think as a broad theme I think your comments make a lot of sense overall and certainly with their large position out with Petrobras walking a long position on rigs, there is certainly a strategy I think to pull back. So overall I think that comment make sense.

So I think more specific to us, we feel I think pretty confident in the high spread contracts we have today with Petrobras I think as you saw previously we did add some terms one of our rigs down there which I think was a good move I think for us overall. But if I would have score kind of where I see the sort of renegotiation bubble moving along. For us right now I wouldn't rather very active with Petrobras, I think where we are, we like our kind of our contract position of high aspect assets through 2018 and look forward to pass a better market on the other side of where we are today. So right now not as most -- not a very active space force in terms of renegotiation.

 

Gregory Lewis:

Okay great, and then just one final on for me. Just as we look at the fleet I mean there is the Valiant and the Endeavor that have potential have a lot of open days of '16. Just as we look at the stack clear and realizing there is not whole lot of work going on but we have seen tenders pop up in the market. Just as we look at the stack fleet is anyway did they quantify or estimate how many of those rigs are more in the one stack category and continue to build building to work?

 

Ron Woll:

Yes thanks for that question. If you look at the Endeavor and the Valiant those are two rigs where we certainly see I think a future ahead in our fleet, Valiant testing is been picked up with some options well from the customers there a few times because they like the productivity is also kind of low cost I think of what others can do.

But I think if I look at the Valiant and Endeavor both I think those are rigs that have good futures. From an asset utilizations standpoint that we have to I think be very purposeful in what we do and although the Endeavor has I think a good career ahead without I think a none contracts sort of right in front of us I think we're look at take for cost down sort of smartly and quickly and so I wouldn't modeled her being in one mode just don't see as part of our ongoing approach.

But I do think longer term they will find both Endeavor and the Valiant go and or revenue stream kind of going forward. We have I think unlike many, we have a fortune of having a fairly I think good contrast --- where in fact can to make those moves both take your utilization today but also play I think for the upside them all.

 

Gregory Lewis:

Perfect. Thank you very much

 

Operator:

Our next question comes from the line of -- of AVG. Your line is open make sure you're not on mute.

 

Analyst:

Sorry guys. I was asking about, can you share some of your thoughts on the new regulation in the U.S. Gulf of Mexico what you think the impact will be and how it is going to effect the activity there.

 

Gary T. Krenek:

Yes sure. The regulations were not quite as --- as we ----- as an industry for example. Come sense prevails on a number of issues an example that are bring up right now is the ---- inspection of the BOP.

That was sort of a five-year one time strip down that got change to staggered inspection for each component which for looking assets in the Gulf of Mexico for example our BlackShips the OEM will be responsible for that and so not only the inspections but also the certification ongoing certification and we will take care of the documentation and tracking as a result.

On the other hand the requirement for let's say the --- the centralize the pipe during --- we will require certain upgrades but in that particular example industry has a 7 year compliance period and not all OEMs currently provide for that feature it will be let's say relatively expensive to upgrade but we've got a seven year compliance period on that. So much of what was ultimately promogated is not that difference to what API ----- requires and in this respect we believe the rigs have less of an impact on our fleet then what we thought. So overall I think from a relative perspective it was an exercise where sense prevails ----- didn't did listen to and take note of the feedback that the industry gave them over the past 12 months.

So it will have an impact but certainly not nearly the impact that we first said.

 

Analyst:

Okay. Good color and then Gary you're continuing to guide on further declining your in your OpEx and some of your peers have sort of mentioned that we have come as for us we could in terms of reductions. Do you think that trend how when you think that trend can continue?

 

Gary T. Krenek:

Well part of the decline as I pointed out is activity related and therefore I hope we have no more declines based on that. But for the most part that if true most of the reductions that we at least have in -- have plans for are in place at this point depending on what happens in the industry, the company certainly can do other things. But remember you want to be able to operate these rigs long term and therefore you have do maintenance on those rigs and continue to spend the money to make sure that they do operate for the long term.

So, company will continue to reduce cost as much as possible but do it in a very sensible manner. If I could just coming on that a significant amounts of our expenses our labor related and as it relates to rigs coming off a contract you can look at that someone of variable expense. But as it relates to our fixed overhead cost, we took a large act of the organization over a year ago now and as oil prices have bottomed we know recovery will come we just can't say when that will come it's very important that the executive level we look at the organization from a sustainability perspective and if we are to accept this down term in a very strong position.

It does mean that we saw looking those things like ---- factory and we have the right resources in place to ensure that the fleet is well maintained and preparation for our recovery and that we consider using our own enhance resources opportunities that could be unique to us as we exit the inevitably and right away that is inevitable recovery. So in terms of fixed cost I think we are probably there, in terms of variable cost we've still got a opportunity as rig some of the contract to which is expensive.

 

Analyst:

Okay thanks Marc and thanks Gary and good luck ----.

 

Operator:

Our next question comes from the line of Darren Gacicia of KLR Group.

 

Darren F. Gacicia: KLR Group:

Hey thanks. First thanks Gary for all your help overtime and Kelly congratulations.

 

Gary T. Krenek:

Thanks Darren.

 

Darren F. Gacicia:

I wanted to follow up on ---- question with the BOP rules is that change in terms some of the older rigs I know that you kind of mentioned in your answer about the 7 year compliance a bit, is that trying to give a window to maybe say that some of that ----- that you won't be pay for the upgrade. or how does that apply and maybe a just broader question about some of your stack rigs as well in terms your thought process on the future?

 

Gary T. Krenek:

Yes you know we've done a lot of work around reactivation cost because that's not immaterial moving forward. We watch the --- BOP rules is an actually on some of the third and fourth generation assets which I will say many have already been upgraded and I also point out, we have a third generation assets starting work this past quarter and the Ocean Apex I believe this morning 520 Singapore time has just started its transit down to Australia ready to commence work down there.

So we've got a number of third and fourth generation assets, so aren't necessarily here in the Gulf of Mexico that have a life ahead of them no doubt about that as it relates to the Gulf of Mexico let's talk about the reactivation cost just for a minute and that will as you suggest will vary according to assets class. But when you bring a rig down and you cold stack it you could be looking at a special survey recertification of the BOPs, other equipment to include not just the drilling ----- but of course marine as well and then when you bring a rig back up you've got to consider the high end trying to rig --- and swelling the cost of frankly what could be a significant customer rig acceptance test.

So you could be looking at cost as sometime could approach $18 million $19 million and more and this is why we always go for hot rig over one that is in stack for any period of time than as it relates to the BOP and the liability around the BOP there is no spear well ahead that you can look up to, to test the BOP that is not being flash for three years. So the client isn't necessarily going to take on that risk and so many will prefer not to as they have an option so for the offshore drillers we believe that as it relates to the Gulf and Mexico and the backlog we have on our six generation assets we're actually in a pretty good position as it relates to bringing cold stack rigs back into service here in the Gulf and Mexico it's an issue that perhaps is less of an issue of a problem for us than it is for our peers.

There is something else you got to consider here as it relates to reactivation cost of cold stack rigs and that really is related to the --- when you look at the cost that the reactivation itself, so allow me to suggest that if the market is transactional when it first returns to start with, idle rigs may remain idle until the hotter and more capable rigs have been absorbed and then day rates have recovered to the appropriate level. So there is a number of things that come into play here as it relates to stacking and bringing rigs back into market. But from our fleet as it relates to the well over $5 billion that we've invested over last five or so years on upgrading our fourth and fifth generation assets and investing in the sixth generation fleet. We actually believe our fleet is actually very well positioned to ride out this down turn and actually being well placed for any recovery especially as it may be transactional for rigs.

 

Darren F. Gacicia:

Got you. Going over to the may be new rig acquisitions side, you made some comments out of the gate about how are you looking at that. Are those conversations now happening more with shipyards with individual companies what's kind of change in the dialog around even thinking about that say over the last six months?

 

Gary T. Krenek:

Well I think from our perspective timing on the recovery you pick up distressed asset today you're going to have to cold stack it and on a fix generation asset that's not an immaterial daily cost and you go to look at the reactivation cost to bring it back into the market and that's kind of eluded to a little bit earlier in my commentary.

I think we might actually see pricing recover faster of the one might assume right now that is because of the cost of bringing the stack rig back into the market for example you are not going to chase transactional market if you looking at a ----- investment of say anything between $50 million and $90 million for a stack asset. So if you look at it from a shareholder value perspective let's say picking up the last this is one of the primary reasons why they were so few bidders on the two asset that we think come to market already and that is what kind of cash flow when you receive over the next five or so years from those assets and I spoke to the fact they weren't the best people call them high aspect assets but you've got to look at in a relative perspective around the sixth generation fleet and frankly there are better sixth generation assets that might to market from the shipyards or from a distress seller for example. So it's actually quite a complex process when you go through and you do the diligence around what is available what price you're going to pay and how much value you're going to get back from those assets. So we looked at the two asset that came available we did not participate in the auction unlike some have been suggesting because we believe that possibly will be better opportunities with better assets that will be more attractive when the market recovers.

So, it's all of the above talking to the shipyard, talking to the owners of distressed asset and figuring out the likely shareholder value that you predict and return for that investment.

 

Darren F. Gacicia:

Well I think you had your way that out with timing of trying ot execute versus maybe other people competing with you for the assets?

 

Gary T. Krenek:

Well, where we will face that always be competition another's coming into the market but at the end of day you just got to look you got to be disciplined, you got to know the true value of the asset that you're chasing, I mean that's one of the five fundamental component around capital allocation and the efficient use of deploying it.

So okay there might be time when we will go and chase an asset but others are willing to pay more for it and we'll just step back and allow them to do so. But at the end of the day, there is limited capital available in the market itself some -- if you look at where we are positioned as a Company compared to our peers as it relates to the contracted availability of the sixth-gen assets. We are by far the best position moving forward. Some companies are still worrying about how they're going to contract six generation asset that a yet to be deliver, I don't have that problem we don't have that problem here at Diamond Offshore.

So there might be others that had a similar balance sheet to us but they've already got uncontracted asset and they are going to be trying to figure out how they are going to put those to work. Whereas from the sixthe generation fleet I don't have that problem.

But as I've being theme of my call it's about maximizing long term shareholder value, it's about the efficient use of capital and the allocation of that capital moving forward. So we will be conservative we'll put a lot of diligence around how we spend our money moving forward, but at the same time we will be prepare to position the company to exit the downturn and ride the next wave.

 

Darren F. Gacicia:

Thanks that's helpful I appreciate it.

 

Operator:

our final question comes from line of Mark Brown of Seaport Global Securities.

 

Mark Brown: Seaport Global Securities:

Hi congratulations to Gary and Kelly as well. I wanted to ask and just to clarify with embassy regulations I know you have given some great color but do you expect operators to require the same level of standards in region outside of the Gulf of Mexico on a go forward basis and is that of any concern?

 

Gary T. Krenek:

We could ---- the size as to how that will develop over the course of the next few years. I think in general you could see a kind of transition to embassy regulations on a worldwide basis. But with the when you've got a grand father of 7 years plus on many of these issues many of the BOPs for example will have to be upgraded in next 7 or so years, I think the market will be very different.

Certainly as it relates to the 20-20 time frame we have seen this flow in the oil price but for the first time a number of commentators and it relates to just some senior people in our industry for example a gentlemen who is on the board ---- right now as well as some of the larger consultancy houses and investment houses out there suggesting that we may see don't be surprise to see price of oil at a $100 and above in the next three and a half, four years time and when we are in that time frame by holding on to assets that we believe have a future as Ron mentioned earlier in the call that there will be in that market and opportunity to put them back to a at reasonable day rates that would allow you to spend the investment from a CapEx perspective as perhaps these rules and regulations transfer across the world. So from a ----perspective let me just reiterate here we have a mixed fleet that has been upgraded we are very comfortable in the assets that we have we are able to put further and fourth generation assets to work in this market as I already illustrated and for those we feel appropriate we will invest for the CapEx keeping these assets working in the future at some stage.

Everyone is kind of focused on the sixth generation assets. The ultra-deepwater asset but that will remain an asset class that is primarily more basis Australia been a great example the North Sea and we will invest from an appropriate perspective in those assets so those particular markets as it relates to ----- regulations to really sumup the points embassy regulations as I have already stated has been issued and they are not as owners as was fit by the industry but only a month ago.

So from our perspective there are certainly something that we can work with and in certain cases it will make sense to invest the appropriate CapEx to keep these rigs working moving forward.

 

Mark Brown:

Thank you. Thank you. I just last question is on the three rigs that you sold in the fleet status. I am just curious what sort of value were you able to get for those either as sales or scrapping.?

 

Gary T. Krenek:

They were scrapped sale to a minimal amount. They were with already assets and we got a very, very small amount to get those. The timing which we sold for it did have some residual value above scrapping value but for most part we go slightly more than we have been --- .

 

Mark Brown:

Thank you.

 

Darren Daugherty:

Okay so, thank you for participating in the call today and as always we look forward to speaking with you again next quarter where you'll be hearing a lot more from Kelly.

 

Operator:

Thank you ladies and gentlemen. This does conclude today's call. You may now disconnect.

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