Diamond Offshore Mulling Repairs on Rig Hit by Katrina

Diamond Offshore Drilling Inc. (DO) said Thursday that it may take as long as a year to repair its one jackup rig that suffered serious damage from Hurricane Katrina.

That estimate includes the time required to determine whether it makes economic sense to repair the rig or simply to take a loss, said Lawrence Dickerson, Diamond's president and chief operating officer. He was speaking at Lehman Brothers' CEO Energy/Power Conference.

On further evaluation, "we will make the call about whether it's a total constructed loss or a candidate for an upgrade," he said.

The rig, the Ocean Warwick, ran aground on an island off the coast of Alabama about 66 miles northeast of its work location.

The rig is insured for $55 million, net of deductibles, but Dickerson said he didn't have a cost threshold in mind at which the company would deem the rig not worth repairing.

"We wouldn't spend $150 million to repair it, because we can build a higher class of rig for $150 million," he said, adding that he might consider paying around $70 million for repairs. While no shipyard slot has been reserved for an upgrade, he said he would like the work to be done in the U.S.

The Houston contract driller also had two semi-submersibles rigs damaged by Katrina but didn't offer any details on repair times or costs.

Diamond has benefited from soaring daily rental rates for semi-submersibles, or floaters, in the Gulf of Mexico and U.K./North Sea markets, as well as for jackups in the Gulf over the past year. Its highest commitments for future work are currently at prices two to nearly four times what they were a year ago, Dickerson said.

The company has fewer floaters than rival Transocean Inc. (RIG) but has the highest leverage to each $10,000 increase in day rates in terms of cash flow per share - roughly 90 cents per share, Dickerson said.

Diamond has $3 billion in floater term contracts, giving it a 60-year backlog, he said.

The oil-service industry has eight new-build floaters scheduled to be delivered between the end of 2007 and 2010, most of them coming to market in 2009 and 2010. That gives Diamond time to reprice its fleet of floaters at higher levels, Dickerson said.

Worldwide, there is demand for 54 additional jackups over the next two years, with 10 to 15 to be taken by Saudi Arabia.

Diamond is in the process of upgrading three fifth-generation deepwater floaters, all of which have firm contracts for six-month to one-year terms.

Observing that day rates started to accelerate in the summer of 2004 when oil was just hitting $40 per barrel, he said it will still make sense to producers to drill even if prices decline from current levels well above $60/bbl.

Diamond shares recently traded down 17 cents, or 0.3%, at $58.45.

This story was supplied by MarketWatch. Copyright 2005 AFX News Limited. All Rights Reserved.

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