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Diamond Offshore Drilling, Inc. (DO)

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Diamond Offshore Drilling, Inc. (DO)

Q4 2016 Earnings Call

February 06, 2017 8:30 am ET

Executives

Samir Ali - Diamond Offshore Drilling, Inc.

Marc Edwards - Diamond Offshore Drilling, Inc.

Kelly Youngblood - Diamond Offshore Drilling, Inc.

Ronald Woll - Diamond Offshore Drilling, Inc.

Analysts

Coleman W. Sullivan - Wells Fargo Securities LLC

James West - Evercore Group LLC

Waqar Syed - Goldman Sachs & Co.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Angeline M. Sedita - UBS Investment Bank

J.B. Lowe - Bank of America Merrill Lynch

Ian Macpherson - Simmons & Company International

Eduardo B. Royes - Jefferies LLC

Haithum Nokta - Clarksons Platou Securities, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Diamond Offshore Drilling, Inc. Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded.

I would now like to introduce your host for this conference call, Mr. Samir Ali, Director of Investor Relations & Corporate Development. You may begin, sir.

Samir Ali - Diamond Offshore Drilling, Inc.

Thank you, Kevin. 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 today only speaks 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 include 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.

Further, we expressly disclaim any obligation to update or revise forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today. And please note that the contents of our call today are covered by that disclosure.

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

Marc Edwards - Diamond Offshore Drilling, Inc.

Thank you, Samir. Hello, everyone, and thank you for joining us this morning. I will start by going straight to the headline numbers for this past quarter. As you have seen, we announced earnings per share for the fourth quarter of 2016 of $0.53. This includes a $0.26 benefit arising from the settlement of a contractual dispute with a client in the North Sea.

Diamond's adjusted earnings per share for the full year of 2016 was $1.43, which compares to an adjusted $3.10 per share in 2015. The year-over-year decrease was primarily driven by the continuing reduction in the demand for offshore drilling rigs and the lower dayrates for those rigs that were re-contracted during the year. Offshore drilling is cyclical in nature, and despite some stabilization in the price of oil, we have yet to see a floor in the declining demand of deepwater assets.

I will speak further to the market in a moment, but first, allow me to discuss some fleet highlights. Recall that we have completed our fleet renewal program and have taken delivery of all five of our newbuild sixth-generation assets. With the addition of the Ocean GreatWhite, Diamond now has one of the youngest active fleets, with an adjusted age of approximately 10 years, well below the industry average of 14 years.

Diamond does not have any assets delayed in shipyards with deliveries pushed out multiple years, nor as of today, do we have any sixth-generation assets that are uncontracted. All of our sixth-generation fleet, the asset class, which I consider to be the most distressed, are contracted through 2019 and beyond at solid dayrates. In this respect, we are unique amongst our peers.

During the summer of 2016, we took delivery of the world's largest harsh-environment sixth-generation, semisubmersible drilling rig, the Ocean GreatWhite. The rig had been commissioned and contracted by BP to undertake its exploration program in the Great Australian Bight. Following the subsequent cancellation of this program, the rig will remain on contract, having been placed into service, following its successful rig acceptance test.

For the immediate future, the decision has been made to place the rig into an extended standby period during which alternative drilling opportunities for the rig will be considered. This extended standby period, with the asset moored in Malaysia, keeps key personnel on the rig at a lower operating cost than what we would have experienced operating in the harsh environment of the Great Australian Bight. As a result, we have worked with BP to lower the rig operating expense and to pass cost savings over to them in the form of a new standby rate. This revised rate still enables Diamond to maintain the same operating margin and cash flows of the original contract.

We view this structure as beneficial to both Diamond Offshore and BP, as it allows Diamond to keep the rig partially crewed, under contract, and maintained with the same operating margins, while our partner is able to reduce expenditures, as they source other work for the rig. This is a win-win for both parties. And we now have the only Moss CS60 design harsh-environment semi that has been delivered from a shipyard. In summary, the Ocean GreatWhite has commenced a three-year contract at a revised dayrate that protects our original contract margins.

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