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Edited Transcript of DO earnings conference call or presentation 1-May-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Diamond Offshore Drilling Inc Earnings Call

Houston May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Diamond Offshore Drilling Inc earnings conference call or presentation Monday, May 1, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kelly Youngblood

Diamond Offshore Drilling, Inc. - CFO and SVP

* Marc Gerard Rex Edwards

Diamond Offshore Drilling, Inc. - CEO, President and Director

* Ronald Woll

Diamond Offshore Drilling, Inc. - Chief Commercial Officer and SVP

* Samir Ali

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Conference Call Participants

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* Eduardo B. Royes

Jefferies LLC, Research Division - Equity Analyst

* Gregory Robert Lewis

Crédit Suisse AG, Research Division - Senior Research Analyst

* Ian MacPherson

Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service

* Jacob Ng

Morgan Stanley, Research Division - Research Associate

* Kay Hoh

Evercore ISI, Research Division - Research Analyst

* Robert James MacKenzie

Iberia Capital Partners, LLC, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Diamond Offshore Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Samir Ali. You may begin.

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Samir Ali, [2]

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Thank you, Grace. Good morning, everyone, and thank you for 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; and Kelly Youngblood, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that the information reported on this call speaks only as of today, and therefore, you're 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 includes known and unknown risks and uncertainties, many of which we're 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 filing with the SEC, included in our 10-K and 10-Q filings.

We further 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.

We will be referencing non-GAAP figures on our call today. Please find the reconciliation on our website.

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

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [3]

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Thank you, Samir. Good morning, everyone, and thank you for joining us today. For the first quarter of 2017, we announced earnings per share of $0.17, which compares to earnings per share of $0.64 in the first quarter 2016. The year-on-year decrease is once again a consequence of the ongoing decline in the demand for offshore drilling rigs and the impact this has on contract day rates. With that said, we commenced 2 new contracts for our sixth generation assets, the Ocean GreatWhite and the Ocean BlackRhino, and additionally, we secured a new term contract for our third generation asset, the Ocean Patriot, as well as securing 2 new short-term contracts for the Ocean Monarch. Overall, I'm pleased with these results as it demonstrates our ability to employ all of our sixth-gen assets and find new work for a variety of asset classes while at the same time maintaining a relentless focus on cost management and increased operating efficiency.

So allow me to give further color on the fleet itself. The Ocean BlackRhino commenced its 3-year term contract for [heads] in the Gulf of Mexico at a rate of $400,000 per day and the Ocean GreatWhite commenced its 3-year term contract to BP. Recall that the rig is currently in standby mode with reduced activity allowing the contract margin to be maintained to that of the original contract rate of $585,000 per day. Additionally, the Ocean Scepter returned to work in Mexico maintaining a presence for us in a market whose importance will only grow in the years to come. I will remind everyone that we are uniquely positioned among our peers as all of our sixth-generation assets are deployed under long-term contracts at rates of over $400,000 per day.

So staying with the sixth-gen fleet, Diamond Offshore set a new technical record during the first quarter when the Ocean BlackLion successfully drilled and completed one of the deepest and most challenging wells on record in the Gulf of Mexico. For the first time, an intelligent well-completion system was successfully deployed simultaneously over 3 [phase-ins] at a depth of 31,000 feet. Our ability to effectively drill and complete such a demanding well exemplifies the Diamond Difference and is a testament to the quality of our operational and technical excellence.

This morning, we also announced that we secured 2 new contracts for the Ocean Monarch in Australia. These contracts will keep one of our premier assets in the region utilized through the end of 2018 and likely, beyond. The Ocean Monarch is currently completing her special survey in Singapore and will then begin working for BHP Billiton on the Northwest shelf of Australia in June. Following this contract, the rig rate will be mobilized to the vast strait to begin drilling for Cooper Energy and then Argent Energy. Diamond has a strong reputation in the Australian market, and these 2 contracts ensure that we will continue to have a presence in the country for many years to come.

In the North Sea, our strong reputation also delivered a new 2-year term contract for the third-generation Ocean Patriot with Apache beginning in the second quarter of 2018. The rig is currently operating to shell and will finish its program in October of this year. After shell, the rig will complete a special survey and will then be returned to service early in 2018.

Diamond Offshore continues to look for new ways to drive efficiencies and to deepwater drilling as our Floating Factory and Pressure Control by the Hour initiatives have demonstrated. And during the quarter, we began implementing our new risk-based asset management system, which enables predictive maintenance. This system has been under development for over 18 months, and we are now ready to implement it fleet-wide. And with this solution, Diamond Offshore will utilize data analytics to manage rig maintenance across our entire fleet for improved reliability and lower operating costs. This approach moves away from the drilling industry's traditional reliance on time-based rig maintenance and embraces leading practices often found in high-reliability industries such as aerospace and power generation.

Our unique-to-the-industry Pressure Control by the Hour construct is now approaching the first anniversary of its implementation, and we are beginning to see tangible benefits. As we deliver improved system reliability, we will lower the total cost of ownership for our customers and will help offshore projects become more economic in the long term. Our implementation of Pressure Control by the Hour and predictive asset management is an important step in positioning Diamond for sustainable success as offshore drilling market dynamics eventually come back into balance.

Now to update you on the contractual dispute with Petrobras on the Ocean Valor. We were recently supported by the Rio appellate court with a significant unanimous verdict that allows the Valor to remain on contract for the foreseeable future. The injunction requires both parties to comply with the terms of the contract, hence, the rig will remain on standby rate and maintain a full crew. We, of course, value our relationship with Petrobras and continue to have a good and productive dialogue regarding other ongoing operations in the region.

And now regarding the market. We believe that it is still too early to call it bottom in deepwater utilization although we could be witnessing the first signs of a trough in falling rig demand. However, even when demand stabilizes, there will likely still be an oversupply in the sixth-generation asset class. At a major industry conference here in Houston during February, many of the operating companies who contract deepwater assets, however, have stated that deepwater can compete on a financial returns basis with shale on North American light tighter oil.

Indeed, full life cycle project NPVs can in many circumstances deliver better returns offshore than onshore, and the real issue here is the timing of the cash flows. While oil prices languish at their current levels, we spend direct investments onshore. However, we are now seeing many IOCs rehabilitating their deepwater portfolios and options with a view as to when to bring sanctioning back over the horizon. Nonetheless, it is important express caution here due to the time lag from project sanctions to the actual commencement of drilling activity. But when current industry investment is at such unsustainable levels, we are finally starting to see discussions in relation to deepwater portfolios. It is clear that deepwater economics continue to improve through project standardization and simplification while competing shell costs are now trending back up. Recent commentary from clients suggest that deepwater still has an important contribution to balancing the future demand supply stack.

So with that, I will turn the call over to Kelly to discuss the financials for the quarter and then I'll have some closing remarks. Kelly?

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Kelly Youngblood, Diamond Offshore Drilling, Inc. - CFO and SVP [4]

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Thank you, Marc, and good morning, everyone. Today, we reported after-tax net income of $24 million or $0.17 per share for the first quarter of 2017 compared to our fourth quarter 2016 results of $116 million or $0.85 per share. The sequential decline was the result of a customer settlement and tax benefit recorded in the fourth quarter for $36 million and $43 million, respectively, partially offset by new contract startups during the first quarter for the Ocean BlackRhino, Ocean GreatWhite and Ocean Scepter.

Contract drilling revenues of $364 million for the first quarter represented a sequential decline of 5%. However, excluding customer settlement in the fourth quarter, revenues actually increased sequentially by 4% driven by improved operating efficiency and the new contract additions during the quarter. Partially offsetting the higher revenue was the Ocean Monarch, which went off contract and started a special survey during the first quarter. Similarly, these items also account for the higher contract drilling costs, which increased 17% compared to the fourth quarter but slightly below our guidance due to the timing of certain costs related to the Ocean Monarch special survey.

Depreciation, G&A costs and interest expense were all within the range of our previous guidance. The effective tax rate for the quarter was approximately 4%, lower than our previous guidance, resulting from the net effect of a favorable geographic mix of earnings and various discrete tax items recorded during the quarter.

And finally, in April, we completed the sale of the Ocean Spur, which is the last remaining rig classified as an asset held for sale. Since 2012, we have sold 27 rigs, the majority of which have been scrapped. These actions to rationalize our fleet have allowed us to increase the focus on our premier deepwater assets. And additionally, Diamond now has one of the youngest active fleets with an adjusted average age of approximately 10 years, which is well below the industry average of 14 years.

I will now discuss some of the more noteworthy items impacting our outlook. First, as previously mentioned, the Ocean BlackRhino, Ocean GreatWhite and Ocean Scepter began new contracts during the first quarter. Our second quarter results will benefit from a full quarter of operations positively impacting our revenues and profitability. Next, the Ocean Monarch will be completing a special survey and other contract preparation activities and will go on contract late in the second quarter. Partially offsetting these improvements are the Ocean Guardian and Ocean Victory, which will go off-day rate in the second quarter. The Guardian is currently planned to be warm stacked awaiting the results of various opportunities later this year and in 2018. Lastly, we have a special survey for the Ocean Patriot scheduled to take place in the fourth quarter. For more detail related to projections of currently scheduled downtime, please refer to our quarterly rig status report that we filed this morning.

Now moving on to more specific guidance for the second quarter. We expect contract drilling costs to come in between $205 million to $210 million slightly higher than the first quarter due to the full quarter effect of the new contract conditions, partially offset by the warm stacking of the Ocean Guardian and Ocean Victory rolling off contract. We estimate depreciation expense to be approximately $87 million for the second quarter of 2017. G&A costs are expected to be approximately $17 million to $19 million in the second quarter, in line with our recent run rate.

Interest expense on our current debt and expected borrowings on our bank line of credit is projected to be approximately $27 million in the second quarter and as expected, to be at similar levels for the remainder of the year. We anticipate our effective tax rate to be approximately 20% in the second quarter. Of course, the rate may fluctuate up or down based on a variety of factors, including but not limited to, changes of geographic mix of earnings as well as tax assessments, settlements or movements in exchange rates.

For our capital expenditures' guidance, we now estimate that we will incur maintenance capital cost of approximately $145 billion for the full year of 2017. And finally, I want to reiterate the strength of our balance sheet and liquidity position. We currently have an undrawn revolving credit balance of $1.5 billion. And with the recent court ruling on the Ocean Valor, our liquidity and cash flow position are further enhanced as we believe the recent court decision has materially derisked our forecast. With no significant plans capital expenditures ahead of us, Diamond Offshore is positioned to generate significant free cash flow over the coming years that can be deployed in our variety of ways.

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

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [5]

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Thank you, Kelly. So just building on that, before we open the call up for questions, I'd like to reiterate that there's been no change to our forward capital allocation's strategy, which is to position for opportunities, stress asset purchases, possible M&A and our build of Floating Factory. We cannot control the deepwater market, but we can best position Diamond for the eventual recovery and as such, the efficient use of capital remains our focus. In the last few years, Diamond Offshore has demonstrated our ability to innovate and drive thought leadership in the industry to improve efficiency and lower the total cost of deepwater drilling. Coupled with our superior balance sheet and strong liquidity, we believe Diamond remains well positioned for the eventual market recovery.

And with that, I will open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Greg Lewis from Crédit Suisse.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [2]

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So Marc, I mean, clearly, there was some good news announced this morning down in Brazil and some work. Just -- and you mentioned, I guess, in February, the market has bottomed. Is the company starting to kind of be able to look through what's going on in the market and maybe hit a certain point, start to get aggressive? I mean, it seems like what I would argue is your core rig can continue to sort of win pieces of work. Is that changing the strategy at all and maybe making the company a bit more aggressive in how you're thinking about the next 2, 3 years?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [3]

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Greg, we've always been monitoring the market very, very closely as it relates to estimating when a bottom might materialize. In my prepared remarks, let's be clear, I think we're beginning to see the signs of a bottom. I haven't actually said that we're at the floor. And let's also realize that there's both demand and supply issues as it relates certainly to the sixth generation fleet, so we still remain somewhat cautious as to what strategies we will enact moving forward. The future use of capital is very, very important to us, and we have to continue to be opportunistic as it relates to the moments when we pull those levers. So I'm not suggesting at any stage now that we are ready to pull a lever in any particular direction. We're maintaining our optionality moving forward. And I think what we have to see is utilization start to track back up before we can truly call a bottom and suggest that the market is recovering. Now you mentioned we've obviously also got some good news this quarter, which we certainly do, and that relates to our ability to continue to put to work assets that are, to be clear, in the moored category. There's not much turmoil that's out there today, but let's just reiterate that we've just put a third-generation asset to work for 2 years at what could be described as quite a reasonable rate in this market. So certainly, there's positives that are out there right now. But I'm not exactly calling a bottom in the market at this particular moment in time.

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Gregory Robert Lewis, Crédit Suisse AG, Research Division - Senior Research Analyst [4]

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Okay, that make sense, it's still early days. And then just, I guess there was another announcement that are -- there was announcement out this morning that another 3 jack-ups were sold. I believe Seadrill selling those -- selling 3 jack-ups. Just given the fact that there is some jack-up activity in this marketplace, the company maintains the 1 -- the sector, is the jack-up market -- it seems like it's noncore, is this an asset that we potentially could be sold out of the fleet? And in the next year or 2 as sort of the jack-up market looks like it's -- as transactions look like they're picking up in this market? Or should I say is anybody calling you about potentially buying this rig at this point in time?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [5]

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So we continue to have inquiries on the Scepter. It is a good rig. It's our only jack-up that we remaining but critically for us, it maintains our presence in Mexico and that is very, very important. We've been in Mexico for well over a decade, 1.5 decades. And it's apparent to all that Mexico has a lot of potential in the deepwater space moving forward into the future. And therefore, our presence there or our continued presence there remain most important to us. So at this moment in time, we have no intent to offload the Scepter. It's a good rig on a good contract and it maintains our presence in the market that will be very important for us moving forward.

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Operator [6]

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And our next question comes from Ian MacPherson from Simmons PJS.

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Ian MacPherson, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [7]

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Congratulations on the new work for Patriot and Monarch. I was wondering if you could discuss what types of work those contracts entail, if it's traditional drilling, if there's more P&A lined up for those or well in the rich and other types of activity? And if you could just comment at all on your winning formula, winning pretty respectable term work here at a very price competitive environment. If you think it is a price-dictated market right now or if you're able to add backlog like that on another competitive basis that's unique to Diamond?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Chief Commercial Officer and SVP [8]

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Yes. Ian, this is Ron Woll. So we were quite pleased to put the Patriot to work on some term contracts. That's pretty uncommon right now for that asset class, so we're kind of quite pleased to see that happen. I think it's largely a function kind of [Rio] of her performance previously with both the Apache and Shell. I think rig operating results matter a lot to customers. And I think a good productive resume kind of helps us put those rigs back to work. So with regard to the Patriot, we are optimistic that she'll have a good solid run here with Apache starting mid next year. The work in the vast straits there for Cooper and origin on the Monarch, I think that's also a case of rigs that work well with operators, tend then to attract sort of more work. So her strong resume in Australia, I think, matters a lot to operators and so it's a combination of things, smarts, kind of bid economics as well as strong operating results is really part of that winning formula. So I would expect that good results is going to bring sort of more future work for both Patriot and the Monarch and other rigs. We're quite pleased.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [9]

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So just building on that just for a minute, Ian. You said what's particularly unique to Diamond around here. Let's not underestimate the fact that our fleet is a broader more varied fleet than many of our peers, for example, and I've often spoken in the past about much of the distress really being positioned around the sixth generation assets. As you've seen here, we've got some good term work with our moored assets, which over the course of the past 5 years, we've invested substantially on upgrading. And that asset class itself, when you look at the scrapping that's going on, is somewhat fixing itself perhaps better than the DP asset class or the DP rigs themselves. So I don't think it's unsurprising that as we move forward, we could expect to see certainly in terms of the initial recovery. I think moored rigs coming back to work faster than the DP asset class. And I think this is just an example of that, for example, and suggests why Diamond is somewhat better positioned than our peers.

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Ian MacPherson, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [10]

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Okay. Separately, Kelly, I got your guidance. I might have missed it or you might have provided revenue guidance, we do have a little bit more capacity there with not all of your contracts are visible to us now. But my model shows revenues in the second quarter flat to up a little bit sequentially. Is that a fair starting point?

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Kelly Youngblood, Diamond Offshore Drilling, Inc. - CFO and SVP [11]

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That is very fair. You're exactly right. But if you go through the different items, we have the 3 new contracts, the Rhino, the GreatWhite and the Scepter. We get a full quarter of benefit in the second quarter. You've got the Monarch, that will be kicking in late, in Q2, and then you've got the on a kind of offsetting that somewhat, you've got the Victory that will be coming off contract in the middle of the second quarter and the Guardian that was warm stacked early in the quarter. So if you net all of those things out, you're spot on, Ian. It will be flat to slightly higher.

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Operator [12]

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And our next question comes from Rob MacKenzie from Iberia Capital.

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Robert James MacKenzie, Iberia Capital Partners, LLC, Research Division - MD of Equity Research [13]

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I wanted to dig in on your risk-based asset management system here a little bit. And maybe if you could help us understand the potential financial returns and whether or not that's going to be primarily driven by of the increased uptime and/or reduced operating costs and how that might break out among the 2?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [14]

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So we've been working on implementing this new program for the past 18 months, and now we're ready to roll it out across the fleet. I don't think you're going to see a binary change in costs management. I think over the course of the next couple of years, however, we will see an improvement in reducing our maintenance expense across the fleet. And this really is based on using predictive maintenance and analytics to establish when is the best time from a cost perspective and an NPT perspective to replace componentry across the rig itself. So it's not just related to subsea, it's also related to the drilling equipment and so on and so forth. Now bear in mind that any cost impact that comes from this can have a knock-on effect with rig efficiencies and reliability in terms of reducing NPT. As it relates to predictive analytical analysis of potential failures on certain rig components. So at this stage, I think it's somewhat a little bit too early to throw out a specific number. I do feel that as industry goes down this path, I mean this is not necessarily unique to ourselves, that we will further reduce costs in deepwater drilling. But in terms of the true impact of rig efficiencies and reducing NPT, we've got to hit the poor performance of the subsea stacks and the BOPs and that's why I think we'll see more improvement coming through our Pressure Control by the Hour initiative and certainly this rig base system for maintenance. I think the real low-hanging fruit is just getting the subsea stack reliability up to spec and to where it should be, and then beyond that we can focus on predictive analytics as it relates to maintenance and take some cost out of there. So there's not one single silver bullet that's going to address rig reliability. This is just another add-on. But from our perspective, the big issue is Pressure Control by the Hour and then the rig-based asset management system follows on behind that.

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Robert James MacKenzie, Iberia Capital Partners, LLC, Research Division - MD of Equity Research [15]

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Great. And then quick follow-up on both Patriot and the Monarch. Both of which have a gap, I think you mentioned in the prepared remarks, that there's a survey of between each of those. Is there any expectation for work for either of those rigs between their contracts expires this year and the stuff of work starting next year?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Chief Commercial Officer and SVP [16]

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Rob, this is Ron. On the Patriot, the answer would be yes. So in between the special survey concluding and the start of the work with Apache, there's a gap that we're mindful of and that represents the next sort of value of commercialization work we'll first pay attention to. So there are some things we're focused on there, nothing announced today but to be sure that gap is very much on our minds. With regard to the Monarch, so there is we've got, of course, the survey, transit time, move time so there are some pieces of the schedule where we can try to fill in some of that work. Candidly, depending on sort of what Cooper and Origin do, their program sort of has some options as well which may fill in part of those time. So the next body work for us on both the Patriot and the Monarch is to focus on kind of filling in those gaps. So we're certainly glad to have the contracts that we announced today, and the next piece of work is to come and fill up their schedules.

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Operator [17]

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And our next question comes from Jacob Ng from Morgan Stanley.

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Jacob Ng, Morgan Stanley, Research Division - Research Associate [18]

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You previously shared a view of the jack-up market having the potential to be more distressed in the floater market, and I wonder if that's a view that's still current given the recent pickup in jack-up interest?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [19]

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So, yes, we've been saying that because of the number of new builds still remained to be delivered in the jack-up space compared with a number of those who actually have contracts. There's over 100 jack-ups that are still in the yard themselves, certainly less than 20 of those have contracts moving forward. So we're a little bit surprised to see the activity in the -- as it relates to the movement of assets in the jack-up space. If you look at the -- if you compare that to moored assets and the DP assets, that overhang in supply is not the same numbers by any sense of the imagination. And I think as you look at the scrapping that has certainly taken place in the moored asset class, the asset class is certainly fixing itself moving forward. As we demonstrated today, we've some secured term work as it relates to moored rigs moving forward. So we don't have a change in that philosophy. I think perhaps as it relates to valuations, you've got to best ask the people that are paying for those valuations as to see how they see the market moving forward.

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Jacob Ng, Morgan Stanley, Research Division - Research Associate [20]

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Got it. Now an equipment manufacturer also brought up last week that more off shore drillers are upgrading equipment to better compete in this caught up market. And I wonder if you can speak to how much built-in pressure the industry's actually feeling from customers to do so in this front? And if this is indeed the trend, what kind of impact do you think this has on broader fleet attrition?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [21]

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So your question is relating to the upgrading of equipment on existing fleet, is that what it is?

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Jacob Ng, Morgan Stanley, Research Division - Research Associate [22]

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Correct.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [23]

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So we're not actually seeing much of that moving forward. I mean, I do understand that these assets, the floating assets are -- they're $650 million, $800 million assets with huge investments on them as it relates to the direct, as it relates to the top drive, as it related to the BOP systems. And to upgrade those systems, it's a lot of money, and we don't actually see our peers investing that money at this moment in time to upgrade the drilling package or the BOPs on their rigs. The rigs are what they are today. And I don't think you'll see many people chasing improvements in a market that remains somewhat challenged certainly for the foreseeable future. So I can't necessarily say that we've seen that. Now from our perspective, we're still looking at the Floating Factory concept, where we are in that is we've got the final designs in place. We've spoken to the -- to a number of yards. We've got a full scale prototype that is -- has been constructed and has been tested. And that's the way we see really the market changing moving forward. Because the pressure from our client is to materially take down deepwater costs through efficiency gains. And something like the Floating Factory is what it's going to be required to deliver on those -- on that opportunity. So obviously, we're going through maintenance schedules. We're replacing equipment as maintenance dictates and sometimes that equipment could be upgraded. In actual fact, on the Patriot contract, we are actually looking at upgrading the top drive but that's just one small data point and it's not necessarily endemic of what's happening in the industry itself.

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Operator [24]

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And our next question comes from Samantha Hoh from Evercore ISI.

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Kay Hoh, Evercore ISI, Research Division - Research Analyst [25]

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You've done a great job outlining all your fleet availability and actually contracting some of these, but the one that we haven't covered yet today is the Victory. And I just wonder if you could maybe talk about the outlook in Trinidad and what you see there in that market?

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Ronald Woll, Diamond Offshore Drilling, Inc. - Chief Commercial Officer and SVP [26]

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Sam, this is Ron. For the Victory, I think Shell concluded work with BP. I would not hold sort of high hopes for some serious work kind of following that program. Certainly, we don't think about our '17 or '18 results sort of having a lot from the Victory right now. So I wouldn't put a lot of sort of financial weight on her revenues or generating power for the balance of this year. I think from a third, fourth and sort of fifth-generation standpoint, we like obviously putting more work on the Patriot. The Monarch has been very successful. But the Victory, I wouldn't model a lot of math around here for the next quarter or 2.

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Kay Hoh, Evercore ISI, Research Division - Research Analyst [27]

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Okay. And then, I guess, the last one for me really is just on the pace of the floater retirement in the industry. You guys have done more than your share of just helping to correct this market. And I was just kind of wondering what you anticipate in terms of as we kind of move through the trough of the cycle, or appears to, in terms of helping to just further improve the availability of floaters and especially in the calls, I guess, where there's just so many rigs cold-stacked. So I'm curious to hear how you're thinking about the cold-stack market or the retirement market?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [28]

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So, Sam, yes. It's -- that's something we are monitoring very, very closely. Yes, we have certainly done our fair share. We -- so there's approximately 70 rigs that are being scrapped so far this cycle and the vast majority of them have been in the fourth generation asset class and below. And of course, around 80% of them have been moored. And as I keep referring to in the call, we do feel that the moored asset class, which is essentially fourth-generation and below, have somewhat fixed itself. We're certainly seeing a slowing down of the scrapping that's taking place in that asset class. But I think for those rigs that have had upgrades over the last few years, I think there's a bright future for them certainly. The question is what's going to happen in the sixth generation asset class. And frankly, I think if we are truly are going to keep an open mind about this, the problem we've gotten in that asset class is the book value that's still sitting on the owners balance sheet as it relates to the value of those assets. And indeed what is probably holding up the scrapping of the sixth-generation DP asset class is the effect of any impairments that would come with those with that scrapping and the resulting effect on the debt covenants that many of those companies are holding. So there's generally a reluctance, I think, to actually grasp the nettle and start scrapping some of the early generations sixth-gen rigs, the ones that came out in '08, '09, '10, for example that are sitting at the back of the deli line in terms of desirability and many of our peers simply just can't afford to take the impairment of those rigs due to, as I mentioned, breaking their debt covenants and as a result they're just sitting out there. I think ultimately, however, if we truly take a look forward to this recovery, which will be somewhat drawn-out, I think that many of those sixth-generation rigs that are cold-stacked today, that are of the early generation of the sixth-gen category will not see the light of day again simply because as each year passes, your activation costs come up too high and therefore, they will effectively be de facto scrapped. They just weren't reenter the market. And I think there are some examples of rigs that went to auction last year that I'd be very surprised to come back into the market moving forward. So there's not enough scrapping certainly taken place in the sixth-gen asset class for reasons that I've just explained, but I think that the market will eventually prove itself out, and certainly those early ones will just simply not see the light of day again and will ultimately be scrapped.

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Operator [29]

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And our next question comes from Eduardo Royes from Jefferies.

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Eduardo B. Royes, Jefferies LLC, Research Division - Equity Analyst [30]

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Just one quick follow-up from a related to -- actually similar to -- along the lines of the last question. Have you seen -- now that we've had the current cycle sixth-gen new builds out there for a few years, have you seen a noticeable difference in terms of drilling efficiencies or performance when you look at some of the rigs that were ordered after 2010 and that's sort of getting delivered in 2014 and '15 versus some of the earlier cycle rigs? So, Marc, I know you just mentioned that the stacking economics is probably what's going to prevent some of those older rigs from ever coming back up because they've been sitting idle. But I'm just curious if you think we've had enough time under our belt now to see some real improved performance from, say, a 2015 vintage rig versus something that was '09 or 2010?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [31]

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So yes and no. I think it really relates to the technical capability of that rigs themselves. So whether it's a hoop load, whether it's off-line capability or the fact that rigs have dual directs on them, I think that there has been a marginal increase in efficiency for the, certainly, the dual direct rigs. But when clients have a choice and effectively when pricing is essentially the same, they will always go for the rigs with that extra capability from a technical perspective. So it's a higher hoop load, it's dual direct capability, it's whether they've got dual BOPs or not, because let's not forget that many of the original assets that came out simply don't have or aren't competitive in terms of those 3 issues: A single BOP, single direct and hoop load is perhaps not as much as is required, certainly, in the Gulf of Mexico for the 30,000 foot wells that are being delivered today. So efficiency increases come through 2 ways. It's actually knowing the reservoir that you're drilling and certainly, for example of flagships, are drilling wells faster today than they did a year ago through just the main knowledge of drilling up those reservoirs. But in terms of the technical efficiency of the rig themselves, they -- dual direct systems is the ones that brings the most advantage and that's anything from 6% to maybe 10%. Now we've done some deworks with our Floating Factory designs. And over and above the dual direct rigs, we can put a further 20 to 30% efficiency gain on drilling the wells out there. So that itself is quite compelling. The real issue we have is that many of our clients, if not all, are not really looking out far enough to the end of the decade for what could potentially be a delivery of that kind of technology. So the latter rigs are slightly better, but where they're going to get hang up is on the fact that they don't have a dual BOP, they're single direct and they have a limited hoop load.

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Eduardo B. Royes, Jefferies LLC, Research Division - Equity Analyst [32]

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If I could actually just sneak one more, I'm curious, you're the second driller to report this season and, I guess this is the second time we hear a lot about or a lot more, I guess, about this sort of predictive analytics maintenance, and obviously we've been hearing some of that on the cap equipment side. Just curious if you could give some perspective on how much is being done in-house, if you will, sort of from scratch with Diamond versus how much is -- are you using some of these bigger household names, if you will, to sort of lay the groundwork and then you work with them. I'm just trying to figure out how much of this is sort of done in-house versus how much is this sort of purchased and from other guys and using what's being developed on the OEM side?

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [33]

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So about 80% is being done in-house, 20% is from third-party vendors. And this is -- let's not confuse Pressure Control by the Hour with rig-based asset-management systems and maintenance systems. The -- on the Pressure Control by the Hour, we actually outsource that entirely to the original equipment manufacturer. And that's been in place for over a year now. We are seeing tangible benefits moving forward in replacing componentry on the subsea stacks with equipment that is significantly more reliable than what was in place previously. So the Pressure Control by the Hour really addresses NPT and rig efficiency. The rig-based asset management systems are more going to impact lowering maintenance costs, and they will have a small impact on reducing NPT as well. But it's important that we don't confuse both issues here. There is a lot going around the industry today about the industrial Internet of Things and they're gathering data and being a little bit more efficient interpreting that data. That's not necessarily new to the industry. I mean, the big diversified service providers have been using data for many, many years as to improve efficiency. Certainly, as it relates to the unconventional work here in North America. But it is time that we bring it to the offshore drillers. And in terms of driving costs out, it's important that we cover all aspects of drilling to include not only in reducing cost but improving efficiencies, reducing NPT and so on and so forth. So amongst all the things, in terms of the thought leadership that's Diamond's bringing to the industry, we truly believe that there's along with Pressure Control by the Hour and certain other things that we've introduced to the industry that we can further bring deepwater costs materially lower than where they were because after all, necessity is the mother of innovation.

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Operator [34]

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I'm showing no further questions at this moment. I'd now like to turn the call back to Marc Edwards for any further remarks.

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Marc Gerard Rex Edwards, Diamond Offshore Drilling, Inc. - CEO, President and Director [35]

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So thank you very much for participating in today's call, and we look forward to speaking with you all again next quarter.

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Operator [36]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.