Darren Daugherty - Director of Investor Relations Lawrence R. Dickerson - Chief Executive Officer, President, Director and Member of Executive Committee Gary T.

Krenek - Chief Financial Officer and Senior Vice President Kane Liddelow

Gregory Lewis - Crédit Suisse AG, Research Division Ian Macpherson - Simmons & Company International, Research Division Todd P. Scholl - Wunderlich Securities Inc., Research Division Collin Gerry - Raymond James & Associates, Inc., Research Division Eduardo Royes - Jefferies LLC, Research Division

Thank you, Maria. Good morning, everyone, and thank you for joining us today.

With me on the call are Larry Dickerson, President and Chief Executive Officer; John Vecchio, Executive Vice President; Gary Krenek, Senior Vice President and Chief Financial Officer; Kane Liddelow, Director of Contracts & Marketing. Joining us on the call from Croatia is Richard Male, Vice President of Contracts & Marketing.

Following our prepared remarks this morning, we will have a question-and-answer session. Before we begin our remarks, I should remind you that statements made during this conference call may constitute forward-looking statements, which are inherently subject to a variety of risks and uncertainties.

Actual results achieved by the company may differ materially from projections made in any forward-looking statements. Forward-looking statements may include, but are not limited to, discussions about future revenues and earnings, capital expenditures, industry conditions and competition, dates the drilling rigs will enter service, as well as management's plans and objectives for the future.

A discussion of the risk factors that could impact these areas and the company's overall business and financial performance can be found in the company's 10-K and 10-Q filings with the SEC. Given these factors, investors and analysts should not place undue reliance on forward-looking statements.

Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. And now I'll turn the call over to Larry.

Thank you, Darren. Good morning, and welcome to the Diamond Offshore Third Quarter Conference Call.

We reported with what would have been otherwise a solid quarter, but by now, you have seen that our results were negatively impacted by certain customers' credit issues. Let me begin by saying that in the 22 years since we gained our present size following a merger, we have suffered only one significant customer credit issue.

However, the events this quarter have added 2 clients, which we believe we should post reserves against our billings. Financial difficulties of OGX have been well documented in the press.

Although it was once a very strong company, projects that were ultimately judged noncommercial have deprived OGX of the cash necessary to meet its obligations. Going into the third quarter, we had 2 rigs working for OGX, the 3,500-foot Ocean Quest and the fourth-generation Ocean Star.

A write-off related to these rigs consisted of $23 million of receivables for second quarter billings and a loss of $35 million of revenues attributable to third quarter billings. Let's talk about the current status of those 2 rigs and their future plans.

We were able to transfer our contract on the Ocean Star to another Brazilian operator, Queiroz Galvao, which will begin in late September and run through February of 2014. This will take the rig past the end of its original OGX time commitment.

We believe there may be future interest in this rig in Brazil, and depending upon our success in obtaining additional work, we plan to leave the Star in that country. The Ocean Quest had been contracted with OGX through December of this year, but we negotiated an end to the contract in late October.

This was done so that we could begin our marketing efforts and secure passage on a heavy-lift vessel to take the Quest to Malaysia for operations in Asia-Pacific. We do not, at this time, have a job with the Ocean Quest, but we believe this rig will be able to take the place of the Ocean Patriot, our third-generation rig currently in Asia-Pacific that will be returning to the North Sea for a 3-year job with Shell.

While the loss of billed revenues and off-contract time for the Quest were significant in the third quarter, we think it's important not to lose sight of the overall success of our past relationship with OGX. This write-down was less than 5% of the total revenue collected over the past several years.

Since 2008, we've had as many as 5 rigs working for OGX in Brazil and have received revenues in excess of $1.4 billion. Our other challenged customer, Niko Resources, is a Canadian company with activities in India and Indonesia.

The Ocean Monarch was signed with Niko in late 2011 for a 4-year commitment beginning in 2012. We originally brought the Monarch to the Asia-Pacific region from the U.S.

in 2011 as part of our effort to relocate equipment from the U.S. Gulf of Mexico following Macondo.

At that time, we judged Niko as being capable of fulfilling this long-term contract based upon the financial strength of its partners in the Indonesian prospects. And additionally, we were impressed by Niko's knowledge of the various basins in that country.

Recently, 2 things have impacted Niko: major cash flow disruptions in their India assets and the withdrawal of some of its partners from participation in the Indonesian program. At present, the Ocean Monarch is idle while we attempt to negotiate a repayment plan for our owed receivables and determine Niko's future commitment to the rig.

We have interest in the rig from other operators, but typical customer lead time in this region makes it unlikely that we will be back on dayrate before the second quarter of 2014. While we have not yet resolved the future of the Ocean Monarch, we believe that the rig's 10,000-foot capability and its excellent operating history will earn it an Asia-Pacific job.

We also have another rig, the Ocean Lexington, currently working in Trinidad for a consortium of companies, including Niko and the lead operator, BG. In late September, the Lexington was scheduled to begin work for Niko, but having been notified that it would be unlikely to collect those billings for the Niko job, we elected to sit idle for approximately 30 days before resuming operations for BG.

The impact to revenue of not working for this period is expected to be approximately $9 million of lost fourth quarter revenue. Let me turn to shipyard delays.

In our Rig Status Report issued yesterday, we updated the delivery schedule of rigs under construction to reflect delays on some of the units. If there's a common thread, it's that this equipment supplier has continued to impact these projects.

Equipment delivery challenges are not limited just to BOP but affect equipment across the board, from engines to drilling systems, and we believe tight schedules are affecting the entire industry, not just Diamond Offshore. That said, we believe that we have adequately accounted for all of this on our revised schedule, and you can continue to monitor our Rig Status Report for further updates.

We look forward to the imminent deliveries of the BlackHawk and BlackHornet and our work with Anadarko in the Gulf of Mexico for the next 5 years. Finally, I'd like to say a few words on overall market conditions, which apart from these customer-specific problems, remain stable.

In ultra-deepwater, there have been some fixtures announced with term at attractive rates, which provide solid data points of demand for rigs to be delivered next year. We are participating in customer discussions and believe that a number of potential opportunities exist for the Ocean BlackRhino, as well as the BlackLion.

In deepwater, we've seen strong customer interest in our units for upcoming availability. The Ocean Apex, our 6,000-foot semi has received a letter of intent from a major oil company to begin working in Q4 of next year for approximately 6 months at a dayrate that is comparable to our other new deepwater semi, the Ocean Onyx.

We see additional opportunities for both the Onyx and Apex beyond what we've initially contracted. Finally, for our new harsh environment semi, we have decided to follow a naming convention of using ocean predators.

Our first rig, which is contracted with BP, will be named the Ocean Great White, as our initial location will be off South Australia where that species is active. We think the Great White will reflect that locality and provide a strong identity for our customers and crews.

With that, I'll turn it over to Gary.

Thanks, Larry. As always, I will give a little color on this past quarter's results and then cover what is to be expected for the fourth quarter of 2013.

For the quarter just ended, we had after-tax net income of $95 million, or $0.68 per share. That was based on contract drilling revenues of $691 million.

EPS decreased from $1.33 in the second quarter due to lower contract drilling revenues and an increase in quarter-over-quarter contract drilling expenses. Larry has already discussed our customer nonpayment situation, so I will not add much additional commentary other than to recap the numbers.

Per GAAP rules, we were required to record a bad debt expense of $23 million pretax for our outstanding receivables at June 30, and we were not able to recognize revenues in the third quarter of approximately $70 million that we billed our customers in accordance with our contracts, thus reducing drilling revenue for the current quarter by that amount. All told, these items resulted in an after-tax EPS reduction of $0.54 per share.

Otherwise, our results for the third quarter were fairly clean. Next, I'd like to discuss contract drilling expenses.

We came in at $419 million, which was about 3% over the high end of our guidance of $405 million. There were 3 main items contributing to costs running higher than expected: the mobe of Ocean Ambassador to a shipyard to prepare for its Pemex contract, slightly higher than expected labor costs associated with crewing up our new-build rigs, and we also had a catch-up in spending for deferred major maintenance project cost in the prior quarters.

Taking results for the first 9 months into account, for the full year 2013, we still expect contract drilling expense to come in slightly below the low end of our original guidance range of $1.6 billion to $1.7 billion. Looking at the other lines on the income statement, depreciation, G&A, interest expense and our Q3 tax rate.

Those all came in relatively close to where we had guided in our last conference call. In order to save time, I won't restate these numbers here but rather refer you to the income statement included in our press release.

Now looking forward to a few of the items that will impact our next quarter's earnings. The Ocean Valiant and Ocean Ambassador will be out of service the entire quarter, with the Valiant out for its 5-year survey and the Ambassador doing both its 5-year survey as well as preparing for its upcoming 2-year contract in Mexico.

The Ocean Princess and Ocean America will also be in port for a portion of Q4, completing their 5-year surveys. In addition to these survey projects, we expect the Ocean Patriot to complete its contract in Southeast Asia and mobe to a shipyard to begin its upgrade work before relocating to the North Sea for a 3-year contract with Shell.

Also, as previously mentioned by Larry, the Ocean Quest will be mobing from Brazil to Southeast Asia. I'll refer you to our Rig Status Report that were released this morning for the exact timing of all these work and the exact number of days we expect rigs to be down in the fourth quarter.

As previously mentioned, during the fourth quarter, we do not expect to recognize revenue from our customer Niko on the Ocean Monarch or the Ocean Lexington. Before I discuss contract drilling expenses in Q4, as always, I would remind everyone that I will be talking about specific line item, contract drilling expenses on our income statement.

These numbers do not include reimbursable expenses, which are reported on a separate line. We estimate the contract drilling expenses in the fourth quarter will be between $405 million and $425 million.

This will be comprised of our normal operating costs, as well as the survey costs for the America, Valiant, Princess and Ambassador that I mentioned earlier. Survey costs for these rigs, which are already included in my estimate, should be approximately $25 million to $30 million during the quarter.

Also included are cost to mobe the Quest to Southeast Asia, which will total approximately $12 million and be expensed in Q4. Amortized cost and contract prep cost will add another $7 million to $10 million to contract drilling expense in Q4.

And finally, our large maintenance -- major maintenance projects have historically been completed and our costs are recorded during the fourth quarter, and I anticipate this will occur again this year and have an impact on total cost. Adding all of these items together, we expect Q4 costs around to run $405 million to $425 million, as I had previously stated.

I'd like to take a moment to reiterate comments I made on our previous earnings call. Darren and I are still getting questions as to when we will start recognizing operating costs on those from BlackHawk.

As dictated by GAAP and our own accounting policies, we will capitalize any type of rig-based cost while the rig is in the shipyard and during its commissioning period. Therefore, we will not record any operating expense for our new-build rigs during those periods.

Rather, those costs will be capitalized and depreciated over the useful life of the rig. After we finish commissioning the rig, we will mobe the BlackHawk to the Gulf of Mexico, where it will begin its 5-year contract with Anadarko.

These mobe costs will also be deferred and amortized over the length of the contract. After arriving in the Gulf of Mexico, we expect the final outfitting and acceptance testing of the rig to last about 30 days.

Rig operating costs during this period will also be deferred and amortized over the length of the contract. The result of this is that we won't be seeing any type of rig operating costs hit our operating cost line for that rig until we actually go on contract with Anadarko.

For our other 6 rigs under construction, including the Ocean Onyx and the Ocean Apex, the cost incurred during the construction, commissioning, mobe, final outfitting and acceptance testing periods will be handled exactly the same way. These costs will be capitalized or deferred and then depreciated as part of the original construction cost to the rig or amortized over the length of its first contract.

Looking to the other lines on the income statement. We forecast G&A for the next quarter to remain constant at somewhere between $16 million to $18 million, the same amount that we've been guiding to for the past 2 years.

Likewise, depreciation should continue at the $97 million to $100 million level for the final quarter of 2013. In the fourth quarter, we expect to capitalize approximately $20 million of our gross interest expense.

Guidance for our tax rate in Q4 remains unchanged at the 27% to 29% rate. Finally, I will update capital expenditures for the full year of 2013.

We do not expect a change for our maintenance capital estimate of $325 million, and new-build capital expenditures should be approximately $1.1 billion. Together, total capital expenditures for 2013 should come in around $1.425 billion.

And with that, I'll turn it back to Larry for any further comments.

Thank you. Let's take a question.

Operator, we'll open up for questions now.

Gary, could you touch on a little bit more how we should think about Niko going forward? Is this fully behind us or is this going -- I mean, how should we think about like factoring this out over the next couple quarters?

Well, this is Larry. We have -- on the Ocean Lexington, which is a smaller amount, they have a $300,000 a day commitment.

As soon as we go back to work for BG, we have solid work with other operators, and we have commitment with Niko on the end of that period. So we've got plenty of advance time to seek alternatives.

So I think that, that thing should not be an issue. On the Monarch, we are idle right now and are pursuing other jobs actively.

As we indicated, we think that may take a while to secure that. So we will be -- we expect it will be idle through Q4 before we can obtain something.

We have some interest, but I can't give you a particular date. And then we will work with Niko to pursue receivables that we have outstanding, and if appropriate, to modify the contract for whoever else we may work for.

I mean, certainly, we've got a way forward, but we don't have a customer identified or a date that we're starting yet.

Okay. But when we think about the remaining for the rig sharing, it sounds like that's at the back end of -- beyond this initial 30 days, that's at the back end of the contract?

That's correct.

Okay. And then when we think about opportunities for the Ocean Victory in the U.S.

Gulf of Mexico, I guess that rig is on contract through late 2014. Should we think about that rig leaving the U.S.

Gulf of Mexico? And if it does, just thinking about -- from what we hear, there's difficulty securing heavy-lift boats to mobilize rigs throughout the world.

Is that something where if the rig is to leave the U.S. Gulf of Mexico, the transportation of that rig out of the Gulf of Mexico needs to be lined up sooner rather than later?

I think that is correct. We're here through just the beginning of '14, to January of '14, on the Ocean Victory.

But we do have other interest in it in this theater. I can't say that we wouldn't mobilize it somewhere.

But I think with moving some of the other rigs around, we're adequately covered, and we're not flooding the Gulf of Mexico with excess capacity in this area. And there is demand for this type of rig, reflective of the kind of rates that we receive on the Ocean Apex and Onyx that are being newly delivered.

So this is not one of my big worry points going forward.

Okay. And then just one final one on the conversions for the Onyx and the Apex.

It looked like those slipped a little bit as well. Is that the same type of slippage related to the new-builds in terms of equipment or is there something specific to those conversions that's making them take a little bit longer?

Well, when we adjusted, we looked at each individual rig and, in some cases, we didn't have a specific item, but we thought it was appropriate for adjusting was to put a contingency for things that might happen that we don't know about. I would say the Onyx, as we indicated, is due to more steelwork required and some issues with the shipyard, and we do have equipment deliveries.

The Apex is not -- has not been delayed as long, but there are some of those factors present.

Larry, in mobilizing the Quest to Southeast Asia without a contract, I think you mentioned that, that rig has good potential to replace the Patriot in that market in terms of demand absorption. But one of the questions I have, I guess, with the Monarch is that the -- Niko's problems seem to also underline the fact that there hasn't been expiration success offshore Indonesia.

And so I guess to me, that sort of puts a damper on the demand visibility for the region. Can you just talk about sort of the character of deepwater and floater demand in Asia as it's evolved and how you see the term and rate opportunities for those rigs developing with these many moving parts?

I'll let Kane comment on that. I guess the one thing is we can't comment on Niko's results.

They're active. But there are other active bids right now in Indonesia.

So there are -- I'm not sure that, that's condemned other prospects.

Certainly, we see broad demand, both on exploration prospects and some meaningful development programs in the same region.

Okay. And then I guess with the Star, I think you mentioned has reasonable visibility for follow-on work in Brazil.

Is there going to be, I think, any moving -- needle-moving demand growth from non-Petrobras participants in 2014 as it relates to floater demand?

I'm not sure we can pinpoint that, but I mean, as you know, there's been some leasing activity and movements for more leasing activity from international oil companies, and that might be -- that's going to be a demand mover. What we're pleased with right now is the companies besides OGX and Petrobras that are active down there.

We're working for one of them right now. We're in discussions with others.

So I would say that would be more likely where we'd be working in the near term while the international oil company prospects develop.

So my question, first, I just want to get a little bit of clarity. In your press release, you mentioned that the LOI for the Apex is similar to the one for the Onyx.

Is that similar both in terms of term and dayrate?

No, we indicated it's a 6-month term, and the Onyx has 1 year. But we're indicating that the dayrate is very close.

Okay. Additionally, could you maybe give us an update on the marketing efforts for the Ocean General and then maybe kind of tell us what your thoughts are for the Ocean Yatzy once it kind of completes its 5-year survey after its contract with Petrobras is done?

I will let Kane talk about the Ocean General, and then we'll come to the Ocean Yatzy.

Well, we see the General good through first quarter, certainly. And then we -- there's a range of shorter term and some interesting long-term prospects for the rig in the region.

So we remain confident we'll keep her working. That's been typical of her work history in that region, and we see it remaining fairly consistent with that.

And the Ocean Yatzy, we are talking right now with Petrobras on some additional work for it, but the rig itself is small. And it's primarily designed for some workover-type activity.

So it's got a unique market to itself. So I'm not -- it's too hard to speculate nor is there data there that I think really points to overall market trends for the rest of the fleet.

But we've got to find the right series of jobs for that rig, and then the rig will probably require some investment. And weighing that investment versus the job prospects will be part of what we'll go through to determine its future life.

Okay. And just one more, if I might.

Kind of just following up on kind of talking about niche market. The combinations market seems like it's really picked up.

And I'm curious, have you guys been approached at all for -- about potentially anybody buying some of your stacked rigs and maybe trying to convert them into a combination unit? Is that something that you guys have even considered doing?

We have been approached in the past to look at these. I think each of these players are analyzing what rigs are available.

There's nothing definite in the line right now.

I guess the question now is there's a ton of moving parts that I think we're all trying to wrestle with, and it's been the source of the bulk of your commentary and some of the questions. And I think what we're trying to get to is how to handle some of these in the near term.

And maybe bucking conventional ways we do things on this call, but can you maybe just give us a little bit of insight into how revenues should work in the fourth quarter relative to kind of the 706-ish range if you include all the downtime in the third quarter? I mean, I'm considering maybe 5% lower than that.

Is that the right range with the downtime?

I think we did a pretty good job of disclosing what rigs are in for survey, and we do have a good cluster of them coming up in fourth quarter, some which were delayed from earlier quarters. And then we're pretty much telling everybody that it's not our expectation that the Monarch will find a job in the next 90 days.

It will take some time to get it lined up where we're comfortable. So those are the really big factors.

And of course, then the Quest will be mobilizing where -- Gary gave some guidance on mobilization. But this will be a fact mobilization without a job, so we'll be expensing that in the quarter.

And I think if you factor those in, I think that'll point you in the right direction as to what kind of revenues we would have. And it's going to obviously decline versus some of our earlier quarters where we had much, much greater uptime than we're looking at presently.

And the only thing I would add is on the surveys, as everyone knows, those things, when we put that Rig Status Report out, that is our best estimate at the time. And most of those surveys are -- the timing is dictated by when a well is going to end, and we bring the rig in at the end of the well.

And so the times will slip and slide. And so please continue to watch future Rig Status Reports, we put them out every 3 or 4 weeks, to watch where those surveys actually go because that will have a big impact on the revenues.

Yes, and I'm with you. I think the goal here is to kind of get everybody on the same page in terms of expectations for fourth quarter.

And so down seems reasonable, and maybe just pressing a little bit further in terms of order of magnitude, is it 5% or 10% or is that as much as I'm going to get?

Well, we give you all the tools, and I'm sorry, we don't actually then say, "And the answer is..."

It's a math problem working off of that Rig Status Report.

All right. Moving forward, and, Gary, you were speaking to the surveys.

And with your fleet, 5-year surveys is always something that comes up and cycles through. Could you maybe just describe in context how 2013 and 2014 are shaping up to be in magnitude of 5-year surveys versus what the average should be?

Is it a high year and then that should oscillate down in '15, '16 or vice versa? Is there some sort of profound move versus the average that we should moderate for in outer years?

Well, '12 was a large year, and '13 has been and will be a large year. And '14 will go down some.

As since they're 5 years, I can already tell you model in '17 and '18 are going to be higher than average. And so next year, we're right now projecting 7 of surveys.

We will have done 11 in 2013. We thought it was going to be 12 and 6, but the Valiant here just recently got pushed out of the fourth quarter of 2013 into the first quarter of 2014, so again -- I'm sorry, not the Valiant, the Alliance.

So again, continue to watch that Rig Status Report. But yes, overall, '14 will be less than '13.

Let's do one more question.

It's actually Eduardo on for Brad. One -- just to go back to the Monarch one more time, and then I've got one other one.

When you guys are talking about maybe finding work in the next 4 to 6 months or so for that, is that a sublet of the existing contract? In other words, those guys will still get a steal of a dayrate that Niko had at 385?

Or is that a sort of kind of cut your losses outright, cancel the contract and market that thing effectively at a competitive dayrate, assuming 385, obviously, is still well below market?

Well, since we -- the contract is still in place right now, I can't tell you which way it's going to go. But we will be looking out after our interests, and I'm sure Niko will be pursuing theirs.

I guess it can go either way, right? Either one of those options is valid, right?

It could work out to where the contract is terminated, and we would have a repricing opportunity.

Okay, got you. And then my follow-on, you hinted about the Yatzy being a unique rig.

I think that's something that's harder for us to see just by looking at a Rig Status Report. If I think out, obviously, we know anything that needs major jobs, so I think we know pretty much everything in '14.

But as I look out to '15 and you start seeing a lot of that core mid-water and some of the other deepwater rigs, especially in Brazil, become more available, is there anything else you can sort of highlight to us because we've seen some of this in the industry lately where certain rigs rolled off contract, and it turned out the rig needed a couple of hundred million bucks, and maybe the visibility wasn't there. Is there anything else that sort of falls into that bucket, unique-type rigs or maybe -- or rigs where you think there's going to be a lot of investment needed, if you will?

Well, I would say the Yatzy is unique. It has a 16.75-inch BOP, which is not the industry standard of 18.5.

When we added that to kind of stretch the rig and its water depth is ranged, it has very little deck load. So those are all the operating envelopes that we work in, which points it in the direction of unique.

And I don't have an estimate of how much cost. We've been combing through our fleet, and the rigs that we've got in cold stack or held for resale are the rigs that we don't think it's worth the money going in.

And it's not always the case of just the money, but the limited capacity of the rigs or the age of those particular rigs. And there may be some more that fall in that range, and they would come out of our mid-water fleet.

But I don't think we're faced with any of our deepwater significant 5,000-foot rigs that aren't in good shape. They might from time to time take some money, but we think the market will absorb that and can sustain that, and that when the rig comes out, it will have adequate capabilities to keep working.

And that's not always the case on some of the smaller rigs. So that's as good as I know at this stage.

So you're sharing that. All right.

Well, thank you very much. We'll talk to you again in a few days.