Darren Daugherty - Director of Investor Relations Marc Gerard Rex Edwards - Chief Executive Officer, President, Director and Member of Executive Committee Gary T. Krenek - Chief Financial Officer and Senior Vice President Ronald Woll - Chief Commercial Officer and Senior Vice President

Ian Macpherson - Simmons & Company International, Research Division Gregory Lewis - Crédit Suisse AG, Research Division Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Praveen Narra - Raymond James & Associates, Inc., Research Division Lukas Daul Thomas Curran - FBR Capital Markets & Co., Research Division David C.

Smith - Heikkinen Energy Advisors, LLC John Booth Lowe - Cowen and Company, LLC, Research Division

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

With me on the call today are Marc Edwards, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; and Ron Woll, Senior Vice President and Chief Commercial Officer. Following our prepared remarks this morning, we will have a question-and-answer session.

Before we begin our remarks, I remind you that information reported on this call speak 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 constitute statements that are forward-looking in nature.

Such statements are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which 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 in these statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in our filings with the SEC, including our annual report on Form 10-K and in our quarterly reports on Form 10-Q.

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. Furthermore, as we start this call, 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.

Thank you, Darren. Good morning, everyone, and welcome to our third quarter conference call.

Let me begin by elaborating on the contract awards that we announced earlier this morning, as of course these awards have added significant backlog in what we see as a challenging market. Starting with that Hess award.

Our remaining newbuild drillships, the Ocean BlackRhino and the Ocean BlackLion are now contracted to go to work in the Gulf of Mexico on the Hess Stampede project. The BlackLion will begin a 4-year contract in the fourth quarter of 2015, and the BlackRhino will commence a 3-year term in Q4 of 2016 after completing its work for Murphy, the rig's launch customer.

This award alone represents over $1 billion of additional revenue backlog. As you know, the first 2 of our 4 new drillships, the Ocean BlackHawk and the Ocean BlackHornet are each contracted with Anadarko on 5-year terms, also in the Gulf of Mexico.

They will be particularly advantageous for us to have all 4 of these units working in the same region right here in our backyard. The Gulf of Mexico can be characterized as one of the lowest-cost markets in the world, and we are positioned to gain even further scale efficiencies by having our personnels, spare parts, support infrastructure for the drillships centrally located here on the Gulf Coast.

Most importantly, we look forward to continuing our long-standing partnership with our customer Hess on what is clearly a major investment for them. The competition for this work was very intense.

And this award is a vote of confidence in the people and the assets of Diamond Offshore. Additionally, we are able to announce that contract extensions with Petrobras have been finalized with a Ocean Courage, the Ocean Valor and the Ocean Baroness, adding 3 years of term for each rig at pricing that is higher than the legacy contracts.

These are very solid fixtures totaling a further $1.4 billion of revenue backlog. So when combined, these 2 awards increase Diamond Offshore's backlog by $2.4 billion from when I last spoke to you.

Staying with Brazil and consistent with its stated objective to focus on ultra deepwater Petrobras, has elected not to extend contracts on the mid-water rigs, the Ocean Yatzy and the Ocean Winter, and we have agreed to terminate the Ocean Concorde contract, which had 8 months of term remaining. Margin from the Concorde will instead be recovered through a day rate uplift on the Ocean Courage.

As I indicated in our prior earnings call, we will not shy away from making the hard decisions. Because we do not believe these 3 mid-water rigs will have opportunities to continue working, we have made the decision to retire and sell them for scrap along with 3 cold stacked units, the Epoch, New Era and the Whittington.

Together, these 6 rigs, which we are removing from the market, have an average age of 37 years. The decision to retire these units involve several factors.

For the 3 rigs rolling off contracts with Petrobras, there would have been large mobilization costs associated with taking them out of Brazil, and we were not willing to incur this expense when jobs are unlikely to become available in other regions. Additionally, the 3 cold stacked rigs were known to require extensive capital upgrades and given the market outlook, investing capital in these units would not have been in the best interest of our shareholders.

As I said before, not all markets require the same technologies, and good returns can still be delivered by assets other than those that are recently new out of the shipyards. Competitively priced mid-water rigs can continue to play a role in our client's operational portfolios for years to come, albeit with a decreasing share of the market.

Across our industry, we continue to expect that some of the higher-generation rigs will compete down. And as we progress through 2015, we expect to see more low-end mid-water units retired across our industry.

So let me now turn to the results for the third quarter. While we did have some noise in the results, which produced earnings per share of $0.38, this includes an after-tax, noncash impairment charge of $0.84 resulting from the retirement of the 6 rigs I've just mentioned.

Also, results for the quarter benefited by $0.26, resulting from the settlement of various tax issues. I will now hand the call over to Gary to give further color on this and our Q3 numbers in general, and then I will make some closing remarks.

Gary?

Thanks, Marc. As always, I will give a little color on this past quarter's results and then cover what's to be expected for the upcoming quarter.

For the quarter just ending -- ended, we reported after-tax net income of $53 million or $0.38 per share, which was based on contract drilling revenues of $728 million. This decrease in EPS from $0.65 from the previous quarter, despite revenues increasing over $78 million quarter-over-quarter.

Obviously, the impairment write-down associated with retiring 6 mid-water rigs was the main cause for the decline in EPS despite the rising revenues, but I'll address that in a moment. Looking at the revenue increase quarter-over-quarter.

The current quarter saw 2 rigs that were previously idle return to work: Ocean Monarch for Total in Southeast Asia and the Ocean Endeavor, which began its 18-month contract with Exxon in the Black Sea. Also adding to the revenues was, first, our newbuild drillship, the Ocean BlackHawk, which worked for a full quarter in Q3; and second, the decrease in survey downtime compared to Q2.

These revenue increases were offset by several of our mid-water semis, which contracts ended in Q3 and which have not been able to find follow-on work. Contract drilling expense was essentially flat quarter-over-quarter, coming in at $400 million, which was less than our guidance of $410 million to $430 million.

The decision to scrap Ocean Concorde and not spend $8 million to $10 million on its 5-year survey was the primary reason for coming in under the low end of our guidance range. The remaining variable [ph] variance compared to the midpoint of our guidance can best be attributed to ongoing efforts to control cost, which, as always, after safety remains one of our top priorities.

As Marc said in his opening comments, the decision to retire and scrap 6 mid-water semis required a $109 million impairment charge in the third quarter. Because this write-down was associated with rigs residing in our international tax structure, no tax benefit was reported as a result of the write-down.

Actually, due to a deferred tax asset that was associated with one of the rigs involved in the write-down, we booked an associated tax expense for the write-down. The net result was an after-tax reduction in earnings of $0.84 per share.

As reported in our press release, we did report tax benefits in the quarter as a result of conclusion of tax audits related to prior years in Brazil and Malaysia, and we reversed prior year tax accruals due to the statute of limitations expiring in several countries. Offsetting these benefits were additional taxes recorded for the change in U.K.

tax laws, which were passed in the third quarter, but were retroactive to April 1 of this year. Normal changes to our estimates in geographies and in various foreign tax rates where we earn our pretax income also negatively impacted the amount of tax expense we reported for the quarter.

We're taking all these pluses and minuses into account. Our tax rate ended up above guidance at 35.5%.

Because of the accounting rules associated with taxes, some of these items will also impact our Q4 tax rate, which we project to be -- will be in the 29% to 32% range. Now for a look at some of the items that will affect our financial performance in the coming quarter.

As always, downtime for surveys and shipyard projects will affect not only revenue numbers, but also contract drilling costs. In Q4, we expect to incur downtime for surveys for only the jackups Ocean King and Ocean Summit.

These are intermediate surveys, so they should take approximately 12 days each, with only a nominal cost above and beyond normal rig operating cost. The Ocean Confidence continues its previously forecasted service life extension shipyard stay through the fourth quarter, which means these operating expenses will be capitalized and deferred, thereby reducing normally recognized cost.

This rig also had its cost deferred in Q3, so there'll be no quarter-over-quarter change in recorded cost for the Confidence. For the exact number of down days expected in Q4 and the timing of these projects and other downtime items I have not mentioned here, I will refer you to our rig status report that we filed this morning.

We expect rig operating cost, as reported in the line, contract drilling expense, to be approximately the same as our cost in Q3. On one hand, rig cost will decrease as a result of our efforts to reduce cost on various rigs that have recently gone stacked or being retired as we have announced.

Offsetting this, the Ocean Patriot returns to work and will begin recognizing operating cost in Q4, cost which in previous quarters, have been capitalized as part of the North Sea upgrade. In addition, we will incur costs to move [ph] the Ocean Star back to the U.S.

Gulf of Mexico from Brazil. And finally, we'll also recognize amortized mobilization and contract preparation expenses related to various rigs in our fleet, which should total $14 million to $16 million in Q4.

As a result of all these items, we are estimating our contract drilling expense for the fourth quarter to be between $390 million and $410 million. This should bring full year contract drilling expense to $1.6 billion, which is below our original guidance of $1.7 billion to $1.8 billion.

As always, I remind everyone that I've been talking about the line on our income statement contract drilling expenses. These numbers that I've just given to you do not include cost incurred in the line reimbursable expenses.

Reimbursable expenses, as always, whatever the amount incurred will be offset almost dollar for dollar with additional reimbursable revenues. With regard to other items on the income statement, we're forecasting depreciation for Q4 to increase to $120 million.

This increase is driven by the expected delivery and associated depreciation for the Ocean BlackHornet, Ocean BlackLion and Ocean Apex, along with increased depreciation on the Ocean Winner. Because the Ocean Winner is still under contract with Petrobras until early 2015, it was written down as part of our impairment charge this quarter to the discounted future cash flows of the rig, which is now being depreciated over the remaining life of its contract.

Interest expense should be in the $15 million to $18 million range in Q4 and G&A continue to be between $18 million and $21 million. As I previously stated, our tax rate for the final quarter of this year is expected to be between 29% and 32%.

But we do expect that rate to fall back into the mid-20s in 2015. I'll give more color on that in our next earnings conference call.

Our capital expenditure guidance, again, remains virtually unchanged from last quarter. For the year 2014, we expect to incur $260 million of maintenance CapEx and $1.8 billion of newbuild CapEx for a total of $2.1 billion.

For 2015, we are still anticipating the capital expenditures to be approximately $80 million, primarily made up of the shipyard completion payment on the BlackLion plus maintenance CapEx. And finally, from a financial and liquidity standpoint, yesterday we successfully increased our credit facility from $1 billion to $1.5 billion.

And Marc will expand upon that in just a moment. We also paid $250 million to bondholders as a result of our 5% 10-year debt issued back in 2004, maturing during the third quarter.

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

Thank you, Gary. So allow me to provide additional commentary on the offshore drilling space.

There's been no change to our assessment that the market is likely to have a significant oversupply of rigs throughout 2015 and well into 2016. The market recovery will likely be drawn out.

However, we are a cyclical business. I have no doubt that eventually market factors will balance and our clients will have to return to prioritizing production and reserve replacement, benefiting from the current decline in supply chain costs.

We've positioned ourselves with a revenue backlog totaling $8.2 billion. This is an increase in backlog of over 40% following the contracts announced this morning.

And most importantly, all of our newbuild units for drillships and the harsh environment semi-submersible are now contracted at good returns, with Tier 1 clients well into 2019 and beyond. Before we move to the Q&A session, allow me to elaborate on Gary's remarks around the increase in our revolving credit facility to $1.5 billion with an extended term of 5 years.

This action increases the flexibility of our already strong balance sheet so that we are well positioned to further enhance the fleet beyond that, which we have already undertaken. Recall that we have retained our A-grade credit rating while investing over $5 billion in new assets and fleet upgrades during the past several years.

Capital allocation is important to us. In that context, the opportunity to renew our fleet by using our balance sheet to buy assets will be a focus moving forward, especially as the current downturn could put further stress on our industry and provide opportunity.

We will continue to look for ways to reposition the company for the inevitable change in this current cycle. And with that, we will now take your questions.

I wanted to see if I could seek clarifications on the precise day rates with Hess because you've given the total contract value. Does that number include any consideration for mobilization on the second rig or any other capital upgrade enhancements that we need to think about when they're still in the day rate?

Yes. Thank you, Ian.

Let me just be clear around the day rate here because obviously this is considered to be, by some, a new low in the market. We don't see it that way.

I run this business from a cash flow perspective, not a headline market rate perspective. You're correct.

There's no mobilization on the second unit. So out of the 4 units that we've now got in the Gulf of Mexico, 3 of them did have mobilization, this one didn't.

But I do believe that in terms of the contribution to the company that -- and from a scale economy perspective, we more than recovered the mobilization there. I'll talk about this $400,000 day rate just for a minute.

I don't believe it's a new low in terms of pricing these assets, at least from a cash flow perspective. Let's first remember that we do have the fourth-, sixth-gen drillships working in our backyard at rates that do provide a solid return on capital.

Scale economies are substantial as it relates to personnel, inventory, logistics, support infrastructure and so on. So however one chooses to slice and dice this opportunity, it brings to us so much more than the headline rate where that first indicate.

You will -- this is important. You will recall from our last call that I had pointed out that we were not able to quantify all pricing as being the same and comparable across geographies.

So somewhat in this context, we know that the cost of operating an asset, let's say, West Africa or Brazil for that matter, are substantially higher than operating in the Gulf of Mexico. So once again, from a cash flow perspective, I would suggest that this is actually not the lowest fixture we've already seen this year.

And there's one example out there, being a sixth-generation drillship in Brazil, contracted over the summer that is more than likely to provide less cash flow than we received on these awards here. So that's basically it in -- from a day rate perspective.

Fair enough for me. And then I just -- my follow-up, I just wanted to touch on a few of your rigs that are open now or soon.

The Confidence finishing its shipyard early next quarter and then also the Valiant, which is also idle, and then you got, I guess, a couple of your rigs in Asia Pac, the Quest in the America rolling next May. So out of those 4 rigs, which I think are your next sort of 4 deepwater rigs with some availability, are there any stacking candidates?

Do you think there's demand in the market to keep 4 out of 4 of those rigs working or how do you assess that today?

Ian, good morning. This is Ron Woll.

Thanks for the question. Let's talk a few of those rigs.

The Confidence, her upgrades are coming along quite nicely. New crew quarters, new deck cranes, refurbishments of type [ph] handling and well control.

And we're having a number of conversation with customers about her availability and are very optimistic about her role in our 2015 fleet. So although I won't get into specific conversations, but suffice it to say that the pipeline there I think is a relatively positive.

So I think we're optimistic on the Confidence. You mentioned the Valiant as the second rig there.

Our decision to proceed with [ph] her, U.K., I think, safety case has proven to be a good choice. We do have significant customer conversations underway.

I am very optimistic she will work in 2015, but candidly, Ian, probably not in the first quarter. I think you've got to look at little bit past the first quarter for her to get some traction.

Okay. And your rollovers in Vietnam and Australia?

Yes. If you look east there, we're -- we do like the work that the Quest is doing in Vietnam.

She has a good reputation based on our performance. We continue to have, I think, some good inquiries from customers, nothing I think I want to report in this conversation, but good traction.

I think that stands in contrast where you've made a hard decision to sideline some of the older rigs like the General that just really don't have that traction. We don't really put the Quest or the America, of course, which the America is doing good work in Australia and again, generating good conversations.

So those stand, I think, apart from the ones we decided to sideline like the Saratoga and the General.

Marc, I'm sure you're breathing a nice sigh of relief with all of these contracts. I guess what I would say is with your newbuild fleet now in place, clearly, you can start focusing on what Diamond does sort of in its -- in going forward.

And just in thinking about that, congratulations on extending the credit facility. I mean, at what point does it make sense for Diamond, as we move through this down cycle, to start trying to build up a cash war chest so that eventually the company can start to go after incremental new rigs?

Thanks very much, Greg. The -- I mean, that is a good question.

As you know, we have an A-grade credit rating, we've got a healthy balance sheet and as you rightly point out, all of our newbuild assets are now contracted through 2019 and beyond at good returns. Specifically, we don't give future guidance as it relates to capital allocation, but let me say this.

It goes without saying that driving capital efficiency is our senior management team's most fundamental responsibility here at Diamond. And in this regard, we regularly review our options with a goal of building long-term value per share.

We've got many levers that we could pull, depending on the opportunity, and all options remain on the table. In my opening remarks, I mentioned that we have increased our revolver to $1.5 billion, as you point out, and we are considering our strategic options with respect to the forward allocation of capital.

With that said, one of the options is, of course, to build this war chest so that we can go and take advantage as opportunities materialize to renew the fleet. So we've got a, let's say, a warrant that is already in place, and we are looking for those opportunities as perhaps they materialize.

So with that said, we'll see how the market kind of progresses over the next 12 to 18 months and see what opportunities materialize. But we're really at the beginning of those stages.

And we do hope, as I mentioned in my prepared statement, that as the cycle turns, the company will look somewhat different than it currently does today.

Okay, great. And then just -- my other question is on -- clearly, you identify the 6 rigs that are going to be, I guess, scrapped was mentioned in the press release, 3 of those rigs were already called stacked, 2 came off, 1 is currently still on work.

I guess my question is, I'm just trying to understand. What made those the 6 vessels -- well, obviously the 3 that were stacked -- what made the 3 -- the 2 current -- more recently working in Brazil and then the final 1 that's working?

What made those the scrap candidates? Just because as I look at the fleet, that there are some other rigs in -- spread in and around the globe that, I would argue, have very similar characteristics to the 6 that were actually chosen to be stacked -- or scrapped.

Well, yes, Greg. Yes and no is the answer to what your last sentence suggested there.

The -- again, we looked at it from a shareholder perspective. For the ones that we are scrapping right now, was it worth the capital investment, the mobilization cost to take them into another market and this current market that we're looking at from a global basis.

And every quarter, we look at our entire fleet and determine whether we should impair assets. Probably right now, we do not expect to have to write down more assets in the near future, but obviously, we've not done the next quarter review.

The -- probably the specific treatment of the Winner should give you an indication of our current thinking. However, that should not imply we will not have to write down assets at some stage again.

With what I know today, I would be surprised if we have to do it again in the next few quarters. But I guess, back to the first question that you asked, how are we repositioning Diamond right now so that when we come out of this downturn, we are much in a more appropriate position to provide long-term shareholder value moving forward.

So first question, on the cost synergies for the Gulf of Mexico drillships, could you quantify these synergies or at least provide us with daily operating costs?

Operating cost should be -- this is Gary, Klay -- somewhere in that $175,000 a day range, give or take. We'll also have some amortized mobe in there that will drive the actual reported cost a little bit higher than that.

But as far as the synergies, we have -- by having all 4 rigs here in the Gulf of Mexico, we're -- we will be able to, instead of buying separate spares for each one of them, we can buy 1 or 2 spares. All of them can share that.

They can share equipment. And this -- the number of the people, the training of people they have in moving people back and forth, and so that means a lot to us.

The -- if we compare the cost that we look at had we taken these rigs some place else say, Brazil, which the cost would've been $50,000 a day more, which, again, as Marc pointed out, we're very happy with the day rate we got and the returns that we'll get on these rigs.

Okay, great. Then a follow-up question just further on the cost structure, how should we think about the scrapping of the 6 mid-water semis given 3-year stack, 2 idle, 1 working?

As far as cost going forward?

Yes.

Certainly. Well, first of all, the Winner continues working until February or March of next year so that won't have any impact on the cost.

The Yatzy and the Concorde, we are demanning those rigs as we speak, and so those costs will come down. And as I have said in my prepared, costs, we will have cost decrease for those.

The 3 cold stacked rigs will have no -- virtually no impact. So yes, cost will come down some in the fourth quarter, more in the first quarter of next year, but offset by some of the things I talked about earlier.

Let me add one other thing, I was passed a note. Just to clarify, in my prepared comments I said CapEx -- well, capital expenditures in 2015, I said $80 million.

I, of course, meant $800 million, just for anybody that has that question.

Quick question. If we could talk about the prospects for the Worker, Alliance and the Clipper, that it received extensions yet.

So if you could talk about where you see those in terms of opportunities and as part of the fleet.

Sure, yes. This is Ron.

Thanks for that question. Of course, the Worker will exit Brazil after her work that concludes in Q1.

There's no doubt she is going to face, I think, some strong mid-water competition. There's no way around that fact.

We do though plan to move her out of Brazil and do see here in our future. I think with her and other rigs as well, the faster contracting cycles play in, which give us, I think, less visibility on how far out her next jobs will get served up.

But we do see her moving forward without a doubt. The Alliance, she's good in Brazil.

They're out through middle of '16. So we're pretty focused on her, on operating productively and safely, but still looks favorably on her.

But I think there is a driving force here with regard to -- operators can show up in the market with a relatively a short lead time and get the rigs that they want. And so in contrast perhaps to some previous periods, the visibility on where they will work probably has a shorter horizon now than it has previously.

Okay. And then -- and just in terms of choosing to scrap the 6 rigs, and this might just be optics, but could you discuss decision not to spend time to pursue a different sale to a different purpose market?

Or I guess, I suppose, is that your view of the secondary market for older rigs as a whole?

These rigs will be taken out of the market. They will be -- we've got a number of entities that we're talking to right now, but they will be sold for scrap and removed from the market.

I was wondering on the Petrobras contracts, if you could say something about the MPD capabilities of those rigs. Are you adding a managed pressure drilling kit?

And is that included in the day rate? Or are you somehow being compensated for that?

The Courage is not.

The Baroness and the Courage...

Valor.

Sorry, the Valor are MPD. The Courage is not MPD.

That's already -- they're already in -- they're already positioned that way.

Okay, okay. So they already have the kit?

That's correct.

And then I was wondering, not getting any mobe fee on the fourth newbuild, one getting into the U.S. Gulf, is that a feature that you are maybe observing on more tenders at the moment that -- or companies who are holding back on paying the mobe fee?

Not necessarily. We contracted the Rhino and got a mobe fee for that, albeit not traditionally at where the market rate has been in the past.

But let's not misunderstand the competition the was out there for this Hess contract. There were 32 rigs bidding for this.

It was very, very competitive. We've already spoken at length about the scale economies we see by having all 4 of our drillships working here in our own backyard in the Gulf of Mexico.

We've already spoken about how the costs for running these drillships, let's say, in Brazil is at least $50,000, possibly more per day, more expensive. So when we looked at this from a strategic perspective, yes, it was something that we had to give away in order to meet the objective of getting all of our newbuild drillships working within what is likely to be a 150-mile radius offshore of the Gulf of Mexico here.

So at the end of the day, you put all this into a big melting pot and then look at it from a cash flow perspective. And frankly speaking, in this market today, we were very, very comfortable with the rate, the overall package, the overall cash flow that we're generating from these assets moving forward for the next 4 to 5 years.

Some people suggest, where is the -- where's the headline day rate going from an ultra-deepwater sixth generation perspective? And from that aspect, I can tell you where the bottom is for Diamond Offshore.

It's $400,000 per day. The -- obviously, the number is different for the other 32 or so drillships, but they're yet to be delivered and yet to secure work.

But let's not underestimate the benefit of these contracts without even the mobilization fee coming into consideration for the shareholders of this company.

All right. That's a very good color.

And finally, can you say something about the future of outlook for Princess in the U.K.?

Yes. Thanks for the question.

This is Ron here. There's no doubt that the oversupply of rigs and somewhat, I think, modest activity levels and the operators suggest that she's going to see some idle time in 2015.

So I think that we will continue to market her and are optimistic on her outlook. But for modeling purposes, I think our utilization will be -- will trend lower, at least in the early part of '15.

Given how you described the outlook for the floating drilling rig market where I think your language got more severe both in terms of the nature and duration of the downturn you now see. Given that, could you provide us with an update on what the feeling would be for you leverage-wise until the cycle turns and which metrics you'll be focusing on for how high you will be willing to take leverage?

Yes, the -- it depends on the opportunity. We've always been self-funding.

We haven't gone through our controlling entity to increase leverage. There are a number of opportunities out there that we could execute on without having to take leverage up significantly.

I think you're very familiar with how this company has been run in the past. It's been somewhat conservative, but then that gives us our current credit rating, which is an A-grade.

The -- and the healthy balance sheet that we have as well. So I'm not specifically going to tip my hand right now and say, "Okay, this is going to be the size of the war chest, and this is the kind of leverage that we're going to have moving forward."

Suffice to perhaps say that maintaining an investment-grade rating for us is important.

Okay. And then as you continue to have conversations with customers, especially in the Gulf of Mexico, have any signaled to you a threshold for leading-edge rates at which should it hit it?

They would definitely be willing to take a specific rig or move forward with the program? Are there levels that you're focusing on that if pricing gets there, you would see the demand response?

Tom, absolutely yes. The -- there's undoubtedly a lot of assets which are competing down, and that will continue.

But obviously, there's -- well, one would have to think that there is a price drop [ph] with certain assets -- become uneconomic from a -- if we're looking at the sixth- and fifth-generation rigs competing down. Pricing is moving down.

I mean, we know that. But some of the older-generation assets will find their niche application from a price perspective again.

And to your point, we are in discussions with a particular client here in the Gulf of Mexico, for example, for mid-water work where project economics dictate that newer-generation fleet is simply too expensive. So we're going through our own fleet and seeing what kind of asset and what kind of return, what kind of cash flow that is still in the interest of our shareholders dictates that we can go and get that work.

So the business development, the business acquisition, the marketing cycle is very, very different to what we've seen over the past few years, and that requires a new approach. So absolutely, yes, we are talking with clients, looking at their project economics when they share them with us and then through [ph] in and out from perhaps the other end of the eyeglass to what typically we did in terms of contracting assets in the past.

Okay. Last one for me.

Could you just give us an update on what the deal pipeline looks like? What kind of prospects are out there at the moment, ranging from individual, attractive assets, all the way up to potential corporate acquisitions?

Well, I'm not going to address potential corporate acquisitions. That's -- no, I'll just leave it at that.

But from specific assets, I'll pass it over to Ron.

Sure, yes. This is Ron.

Ron here. From a pipeline standpoint, I think there's a couple of themes that we see.

I think there certainly is a spreading out of opportunities on the high end of the scale. So you look at that, what sixth-gen opportunities are out there.

We've had a lot, as you well know, of tenders get sidelined, delayed or canceled. You look at Noble in the Mediterranean, Total in Brazil, Chevron Indonesia.

So we've seen a real, I think, a draining of the pond of opportunities for where high-end ships may go. And so that -- for that reason, we're -- of course, we're quite glad to have Hess with us.

If you look further down in the pipeline, there are some nice mid-water tenders out there that we look forward to competing in. But I think as a general theme, what we're finding in is that operators have sublets that they can play in, in addition to new work they can put out.

And so we're finding, I think, shorter contracting cycles, as I mentioned a few questions ago, so operators really can go to market pretty quick and get what they want virtually on-demand. So there's no doubt about it.

It's oversupplied in tough market, but we continue to have, I think, very productive conversation with customers in virtually all markets. So there's work out there.

It will just take, I think, more effort to earn those wins.

All right. I was actually speaking to the pipeline for potential asset acquisitions.

What you're seeing, it shopped around out there that you might actually consider picking off?

Yes. Just going back to my initial statement there, Tom, it's early days.

I think the market will continue to be challenging moving forward. As we look at the market itself, this downturn is likely to be protracted.

And given the lead time between RFQs and the start of drilling, we are at some distance from seeing any green shoots. There's a large number of drillships still to be delivered, a high amount of sublet availability.

There's not much commentary around that, but there is high amount of sublet availability. And we've got a client base that is CapEx adverse at present.

So I think that we're watching the oil price, it was interesting to note today that I think Saudi has started to cut back production. But this downturn is going to be U-shaped.

Are we at the bottom of the U? I don't think so yet.

When it does turn around, I think there'll be a sharp recovery. But it's hard to predict when that timing materializes.

It's very hard to predict. So we've got a list of potential things we can do, probably more on the asset, on the individual asset basis at this point in time.

But I think that the opportunity or the window is going to fall -- perhaps going into the market and picking up assets is going to be better for us in a number of courses out rather than doing it right now. So we're watching the market very closely.

And I'm not going to give you -- tip of my hand, as I suggested earlier, on what we're specifically looking at. But let me tell you, with the help of our controlling company, controlling shareholder, we've got a lot of resources that are looking at debt, are looking at assets and we are focused on what opportunities may materialize.

Now I'm not naive enough to suggest that if we sit here in 12 months' time, we'll look materially different. It depends on what opportunities materialize in the future.

So let me just leave it at that.

I wanted to ask, could you estimate your daily cash operating cost for mid-water and fourth-gen rigs in Southeast Asia?

It depends, of course, on the individual rig, which rig you're talking about and the individual company. But the operating cost will range anywhere from $60,000 to $110,000 a day.

And that includes the fourth-gen rigs maybe at the -- towards the higher end?

That would certainly include the fourth-gen rigs and conventionally more [ph] rigs that we have out there.

Appreciate it. It's good to be the low-cost operator.

Also wanted to ask if your view of the eventual U-shaped recovery also contains a view of how many floaters need to be removed from the global marketed fleet before that right half of the U starts to form.

That's -- how long is a piece of string? It depends how hard it bounces back.

So in terms of specific numbers, I -- we're not going to throw that on the table right now. We've done some work around that.

One of the first things I did when I came in here was work closely with other entities, let's just say, from a strategic perspective. So we've got some idea around that.

I do suspect that although we've announced 6 assets that we're going to turn into razorblades, I think some others in the market space will move forward and also retire assets. But it really is how hard will that come back.

There's a lot of uncertainty in the marketplace. But let's not forget one thing.

The steeper the decline in, let's say, in the price of our commodity now in the height of government [ph] prices, the higher they will have to recover at some point in the future. This business is a treadmill.

And if we step off it now, then we only have to run harder further down the road. The -- there's been commentary around the IEA dropping the demand numbers.

But let's remember, that's not demand dropping, it's the rate -- it's a decline in the rates of demand growth, not demand going backwards. So this will bounce back at some stage in the future.

I can't predict when. But when it does bounce back, it will be a pretty hard.

And that then depends how much of the mid-water fleet gets recontracted. So it's -- there's no specific one answer to your question, suffice to say that we've done some homework around it and we have a kind of envelope as to what that number should be.

I just wanted to ask about capital allocation strategies going forward. I know that you guys had repurchased some shares, I think, in the first quarter.

I guess, what's your thought around doing something similar to that at this point? And also around the dividend, I saw that the language in the press release for the dividend changed a little bit to say that there's no assurance that dividend -- any special dividend is going to be paid or what level going forward?

I guess, if you can just talk about those 2 things briefly.

Yes, the -- so let me just start with share buybacks. As I said before, we don't really give guidance on future capital allocations.

We did have a share buyback program in place prior to my tenure, but -- and this could be an option again in the future. We look at this on an opportunistic basis from quarter-to-quarter.

The special dividend is a special dividend. However, at this stage, no final decision on capital allocation priorities has been made.

And of course, the Board of Directors recently approved the payment of the special dividend for the third quarter, and we'll continue to review this special dividend on a quarterly basis moving forward. And I think really, that's as much as I could declare at this stage.

Okay, fair enough. My other question was on the 3 rigs that you have cold stacked that you decided not to retire.

I guess, what's kind of the difference between those rigs and how come, if you're not actively marketing some of those, how come you didn't choose to retire those as well? I guess, I'm talking about the Saratoga and the General, but also the Vanguard, I guess.

I guess, what's the thought process there between cold stacking and retiring those rigs?

Yes. J.B., this is Ron.

Thanks for that question. If you look at the Saratoga, the General and the Vanguard, we do think they have a future.

We think that future, though, is probably productive when the demand, I think, tightens up more than it has right now. And as Marc has mentioned more than once, this is a cyclical business and we expect that, that positive cycle will follow negative cycles.

And so -- whereas I think some of the rigs that we chose to exit the fleet permanently, I think we've recognized that their best days were behind them. I think in the case of the Saratoga, the General, the Vanguard, they can and likely will work again.

We just have to find the right market conditions when they reenter the fleet.

Okay, that's a good explanation. I guess, we've talked about almost every single rig in your fleet.

I guess one we haven't touched on is the Apex. It's the one that's in Vietnam.

And I was just wondering, do you think that has the potential to stay in the region when it rolls off in the first quarter? Or could that be potentially need to be to be moved somewhere else?

Yes, I appreciate the question. In fact, we were -- I was wondering who was going to ask about the Apex.

It only took 5 minutes. So as you mentioned, she's got final preparations underway in Singapore to work in Vietnam with Exxon, that's coming along on schedule as planned.

It's interesting that we're getting quite a number of inquiries about her. Some, I think, within the same theater, but not limited to Asia.

And so I think, for that reason, we're pretty positive on what she can do after the Vietnam work.

Gary, could you just give us a sneak peek of the 10-Q? What was your CapEx for the quarter and the implied CapEx for Q4?

CapEx for the fourth -- for the third quarter was about $230 million, give or take. And for the fourth quarter, the big -- I'm not sure what we'll spend.

But we have both the Lion and the Hornet scheduled to be delivered from the shipyard. And if you will remember, those contracts were a 30% downpayment, 70% upon completion.

So we -- both of those will be in the $400 million range per rig. So it's going to be substantially increased, mostly because of the newbuild drillships.

All right. Well, thanks for joining us, folks.

We'll see you in 3 months' time, and appreciate you listening in for what has been a very positive quarter for Diamond Offshore. Thank you.