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Article by DailyStocks_admin    (12-16-08 06:56 AM)

The Daily Magic Formula Stock for 12/16/2008 is Diamond Offshore Drilling Inc. According to the Magic Formula Investing Web Site, the ebit yield is 19% and the EBIT ROIC is 25-50%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General
Diamond Offshore Drilling, Inc. is a leading, global offshore oil and gas drilling contractor with a current fleet of 44 offshore rigs consisting of 30 semisubmersibles, 13 jack-ups and one drillship. In addition, we have two jack-up drilling rigs, the Ocean Scepter and the Ocean Shield , under construction at shipyards in Brownsville, Texas and Singapore, respectively. We expect delivery of both of these rigs during the second quarter of 2008. Unless the context otherwise requires, references in this report to “Diamond Offshore,” “we,” “us” or “our” mean Diamond Offshore Drilling, Inc. and our consolidated subsidiaries. We were incorporated in Delaware in 1989.
The Fleet
Our fleet includes some of the most technologically advanced rigs in the world, enabling us to offer a broad range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and jack-up markets.
Semisubmersibles . We own and operate 30 semisubmersibles, consisting of 10 high-specification and 20 intermediate rigs. Semisubmersible rigs consist of an upper working and living deck resting on vertical columns connected to lower hull members. Such rigs operate in a “semi-submerged” position, remaining afloat, off bottom, in a position in which the lower hull is approximately 55 feet to 90 feet below the water line and the upper deck protrudes well above the surface. Semisubmersibles are typically anchored in position and remain stable for drilling in the semi-submerged floating position due in part to their wave transparency characteristics at the water line. Semisubmersibles can also be held in position through the use of a computer controlled thruster (dynamic-positioning) system to maintain the rig’s position over a drillsite. We have three semisubmersible rigs in our fleet with this capability.
Our high specification semisubmersibles are generally capable of working in water depths of 4,000 feet or greater or in harsh environments and have other advanced features, as compared to intermediate semisubmersibles. As of January 28, 2008, eight of our 10 high-specification semisubmersibles were located in the U.S. Gulf of Mexico, or GOM, while the remaining two rigs were located offshore Brazil and Malaysia.
Our intermediate semisubmersibles generally work in maximum water depths up to 4,000 feet. As of January 28, 2008, we had 19 intermediate semisubmersible rigs drilling offshore or undergoing contract preparation activities in various locations around the world. Two of these semisubmersibles were located in the GOM; three were located offshore Mexico, four were located in the North Sea, three were located offshore Australia, four were located offshore Brazil and one each was located offshore Egypt, Indonesia and Trinidad and Tobago.
Our remaining intermediate semisubmersible, the Ocean Monarch, is currently in Singapore where construction activities are underway to upgrade this rig to a high-specification unit which will be able to operate in up to 10,000 feet of water in a moored configuration. See “ — Fleet Enhancements and Additions.”
Drillship . We have one high-specification drillship, the Ocean Clipper, which was located offshore Brazil as of January 28, 2008. Drillships, which are typically self-propelled, are positioned over a drillsite through the use of either an anchoring system or a dynamic-positioning system similar to those used on certain semisubmersible rigs. Deepwater drillships compete in many of the same markets as do high-specification semisubmersible rigs.
Both semisubmersible rigs and drillships are commonly referred to as floaters in the offshore drilling industry.
Jack-ups . We currently own 13 jack-up drilling rigs. Jack-up rigs are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation is established to support the drilling platform. The rig hull includes the drilling rig, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, heliport and other related equipment. Our jack-ups are used for drilling in water depths from 20 feet to 350 feet. The water depth limit of a particular rig is principally determined by the length of the rig’s legs. A jack-up rig is towed to the drillsite with its hull riding in the sea, as a vessel, with its legs retracted. Once over a drillsite, the legs are lowered until they rest on the seabed and jacking continues until the hull is elevated above the surface of the water. After completion of drilling operations, the hull is lowered until it rests in the water and then the legs are retracted for relocation to another drillsite.
Most of our jack-up rigs are equipped with a cantilever system that enables the rig to cantilever or extend its drilling package over the aft end of the rig. This is particularly important when attempting to drill over existing platforms. Cantilever rigs have historically earned higher dayrates and achieved greater utilization compared to slot rigs.
As of January 28, 2008, seven of our 13 jack-up rigs were located in the GOM. Four of those rigs are independent-leg cantilevered units, two are mat-supported cantilevered units, and one is a mat-supported slot unit. Of our six remaining jack-up rigs, all of which are independent-leg cantilevered units, two were located offshore Mexico, one was located offshore Indonesia, one was located offshore Egypt, one was located offshore Croatia and the other rig was located offshore Qatar.
In addition, we have two premium jack-up rigs currently under construction. We expect delivery of both of these units during the second quarter of 2008. See “ — Fleet Enhancements and Additions. ”
Fleet Enhancements and Additions . Our strategy is to economically upgrade our fleet to meet customer demand for advanced, efficient, high-tech rigs, particularly deepwater semisubmersibles, in order to maximize the utilization of, and dayrates earned by, the rigs in our fleet. Since 1995, we have increased the number of our rigs capable of operating in 3,500 feet or more of water from three rigs to 13 (10 of which are high-specification units), primarily by upgrading our existing fleet. Six of these upgrades were to our Victory-class semisubmersible rigs, the design of which is well-suited for significant upgrade projects. We are in the process of upgrading one of our remaining Victory-class rigs in Singapore, and we have two additional Victory-class rigs that are currently operating as intermediate semisubmersibles that could potentially be upgraded at some time in the future.
In 2006, we began a major upgrade of the Ocean Monarch , a Victory-class semisubmersible that we acquired in August 2005 for $20.0 million. The modernized rig is being designed to operate in up to 10,000 feet of water in a moored configuration for an estimated cost of approximately $305 million. Through December 31, 2007, we had spent $181.4 million related to this project. The Ocean Monarch is expected to be ready for deepwater service in the fourth quarter of 2008. The rig will then return to the GOM where it is expected to begin operating under contract in early 2009.
The upgrade of the Ocean Endeavor to 10,000 foot water depth capability was completed in 2007 for a total cost of approximately $248 million, substantially all of which had been spent through December 31, 2007.
In the second quarter of 2005, we entered into agreements to construct two high-performance, premium jack-up rigs. The two new drilling units, the Ocean Scepter and the Ocean Shield, are being constructed in Brownsville, Texas and Singapore, respectively, at an aggregate expected cost of approximately $320 million, including drill pipe and capitalized interest, of which $248.5 million had been spent through December 31, 2007. Each new-build jack-up rig will be equipped with a 70-foot cantilever package, be capable of drilling depths of up to 35,000 feet and have a hook load capacity of two million pounds. We expect delivery of both of these units during the second quarter of 2008. The Ocean Shield is expected to begin working under a one-year contract offshore Australia beginning in the second quarter of 2008. See “Risk Factors” in Item 1A of this report.

Markets
The principal markets for our offshore contract drilling services are the following:
• the Gulf of Mexico, including the United States and Mexico;

• Europe, principally in the United Kingdom, or U.K., and Norway;

• the Mediterranean Basin, including Egypt, Libya and Tunisia and other parts of Africa;

• South America, principally in Brazil;

• Australia and Asia, including Malaysia, Indonesia and Vietnam; and

• the Middle East, including Kuwait, Qatar and Saudi Arabia.
We actively market our rigs worldwide. From time to time our fleet operates in various other markets throughout the world as the market demands. See Note 17 “Segments and Geographic Area Analysis” to our Consolidated Financial Statements in Item 8 of this report.
We believe our presence in multiple markets is valuable in many respects. For example, we believe that our experience with safety and other regulatory matters in the U.K. has been beneficial in Australia and in the Gulf of Mexico, while production experience we have gained through our Brazilian and North Sea operations has potential application worldwide. Additionally, we believe our performance for a customer in one market segment or area enables us to better understand that customer’s needs and better serve that customer in different market segments or other geographic locations.
Offshore Contract Drilling Services
Our contracts to provide offshore drilling services vary in their terms and provisions. We typically obtain our contracts through competitive bidding, although it is not unusual for us to be awarded drilling contracts without competitive bidding. Our drilling contracts generally provide for a basic drilling rate on a fixed dayrate basis regardless of whether or not such drilling results in a productive well. Drilling contracts may also provide for lower rates during periods when the rig is being moved or when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather conditions or other conditions beyond our control. Under dayrate contracts, we generally pay the operating expenses of the rig, including wages and the cost of incidental supplies. Historically, dayrate contracts have accounted for the majority of our revenues. In addition, from time to time, our dayrate contracts may also provide for the ability to earn an incentive bonus from our customer based upon performance.
A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well or a group of wells, which we refer to as a well-to-well contract, or a fixed term, which we refer to as a term contract, and may be terminated by the customer in the event the drilling unit is destroyed or lost or if drilling operations are suspended for an extended period of time as a result of a breakdown of equipment or, in some cases, due to other events beyond the control of either party to the contract. In addition, certain of our contracts permit the customer to terminate the contract early by giving notice, and in some circumstances may require the payment of an early termination fee by the customer. The contract term in many instances may also be extended by the customer exercising options for the drilling of additional wells or for an additional length of time, generally at competitive market rates and mutually agreeable terms at the time of the extension. See “Risk Factors — The terms of some of our dayrate drilling contracts may limit our ability to benefit from increasing dayrates in an improving market” and “Risk Factors — Our business involves numerous operating hazards, and we are not fully insured against all of them” in Item 1A of this report, which are incorporated herein by reference.

Customers
We provide offshore drilling services to a customer base that includes major and independent oil and gas companies and government-owned oil companies. During 2007, we performed services for 49 different customers, none of which accounted for 10% or more of our annual total consolidated revenues. During 2006, we performed services for 51 different customers with Anadarko Petroleum Corporation (which acquired Kerr-McGee Oil & Gas Corporation, or Kerr-McGee, in mid-2006) and Petróleo Brasileiro S.A., or Petrobras, accounting for 10.6% and 10.4% of our annual total consolidated revenues, respectively. During 2005, we performed services for 53 different customers with Petrobras and Kerr-McGee accounting for 10.7% and 10.3% of our annual total consolidated revenues, respectively.
We principally market our services in North America through our Houston, Texas office. We market our services in other geographic locations principally from our office in The Hague, The Netherlands with support from our regional offices in Aberdeen, Scotland and Perth, Western Australia. We provide technical and administrative support functions from our Houston office.
Competition
The offshore contract drilling industry is highly competitive and is influenced by a number of factors, including global demand for oil and natural gas, current and anticipated prices of oil and natural gas, expenditures by oil and gas companies for exploration and development of oil and natural gas and the availability of drilling rigs. See “Risk Factors — Our industry is highly competitive and cyclical, with intense price competition ” in Item 1A of this report, which is incorporated herein by reference.
Governmental Regulation
Our operations are subject to numerous international, U.S., state and local laws and regulations that relate directly or indirectly to our operations, including regulations controlling the discharge of materials into the environment, requiring removal and clean-up under some circumstances, or otherwise relating to the protection of the environment. See “Risk Factors — Compliance with or breach of environmental laws can be costly and could limit our operations ” in Item 1A of this report, which is incorporated herein by reference.
Operations Outside the United States
Our operations outside the United States accounted for approximately 50%, 43% and 45% of our total consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively. See “Risk Factors — A significant portion of our operations are conducted outside the United States and involve additional risks not associated with domestic operations ,” “Risk Factors — Our drilling contracts offshore Mexico expose us to greater risks than we normally assume ” and “Risk Factors — Fluctuations in exchange rates and nonconvertibility of currencies could result in losses to us ” in Item 1A of this report, which are incorporated herein by reference.
Employees
As of December 31, 2007, we had approximately 5,400 workers, including international crew personnel furnished through independent labor contractors. We have experienced satisfactory labor relations and provide comprehensive benefit plans for our employees.
Access to Company Filings
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and accordingly file annual, quarterly and current reports, any amendments to those reports, proxy statements and other information with the United States Securities and Exchange Commission, or SEC. You may read and copy the information we file with the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings are also available to the public from the SEC’s Internet site at www.sec.gov or from our Internet site at www.diamondoffshore.com. Our website provides a hyperlink to a third-party SEC filings website where these reports may be viewed and printed at no cost as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC. The information contained on our website, or on other websites linked to our website, is not part of this report.
Item 1A. Risk Factors.
Our business is subject to a variety of risks, including the risks described below. You should carefully consider these risks when evaluating us and our securities. The risks and uncertainties described below are not the only ones facing our company. We are also subject to a variety of risks that affect many other companies generally, as well as additional risks and uncertainties not known to us or that we currently believe are not as significant as the risks described below. If any of the following risks actually occur, our business, financial condition, results of operations and cash flows, and the trading prices of our securities, may be materially and adversely affected.


MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion should be read in conjunction with our Consolidated Financial Statements (including the Notes thereto) in Item 8 of this report.
We provide contract drilling services to the energy industry around the globe and are a leader in offshore drilling with a fleet of 44 offshore drilling rigs. Our fleet currently consists of 30 semisubmersibles, 13 jack-ups and one drillship. In addition, we have two jack-up drilling units under construction at shipyards in Brownsville, Texas and Singapore. We expect both of these units to be delivered during the second quarter of 2008.
Overview
Industry Conditions
Worldwide demand for our mid-water (intermediate) and deepwater (high-specification) semisubmersible rigs remained strong throughout the year 2007 and into 2008. The jack-up market in the U.S. Gulf of Mexico, however, continues to experience reduced demand, resulting in downward pricing pressure and some of our jack-up rigs being ready-stacked for periods of time between wells. Exclusive of the GOM jack-up market, which accounted for nine percent of our total revenue for the year ended December 31, 2007, solid fundamental market conditions remain in place for all classes of our offshore drilling rigs worldwide.
Gulf of Mexico . In the GOM, the market for our high-specification semisubmersible equipment remains firm. One of our high-specification rigs is contracted for work in the GOM until late in the fourth quarter of 2008, while the remaining seven high-specification rigs currently located in the GOM have contracts that extend well into 2009 and beyond, including two at dayrates as high as $500,000 for future work. In many cases, these contracts also include un-priced option periods that have neither been exercised nor have expired.
As of the date of this report, dayrates for intermediate semisubmersibles in the GOM, where we currently have one such unit operating, are ranging between $250,000 and $300,000. During 2007, strong international demand offering lengthy terms encouraged us to obtain international contracts for four of our intermediate rigs that were previously located in the GOM. All but one of these rigs has left the GOM. The fourth unit is in a shipyard in Brownsville for a survey and life extension project. We expect this rig to depart the GOM in the second quarter of 2008 for Brazil. We continue to view the deepwater and intermediate markets in the GOM as under-supplied and believe that the GOM semisubmersible market will remain strong in 2008.
Our jack-up fleet in the GOM continued to experience lower utilization and dayrates during the fourth quarter of 2007, compared to the third quarter of 2007, as four of our seven available rigs were ready-stacked for periods of time and average dayrates declined slightly from those earned during the third quarter of 2007. As of January 28, 2008, all seven of our available jack-ups in the GOM were on contract, although the well-to-well nature of the market persists. The international market for jack-ups remains generally strong. As a result, we signed a two-year term extension with KODECO Energy Co. LTD. for the Ocean Sovereign in Indonesia at a dayrate in the mid $140,000s that is expected to commence in the second quarter of 2008. The mobilization of the Ocean Columbia from the GOM to Mexico also was completed during the fourth quarter of 2007, and that unit began operating in the first quarter of 2008. We believe that the current market environment for jack-up rigs, both in the GOM and internationally, will continue at least through the first quarter of 2008.
Brazil . During 2007, we added two semisubmersible rigs to our fleet in Brazil, where we currently have five semisubmersibles and one drillship operating. Two additional semisubmersible units, the Ocean Yorktown and Ocean Worker , are expected to commence operations there in the second and third quarters of 2008, respectively. Our drillship is contracted until the end of 2010. Of our other seven rigs that are or are expected to be working offshore Brazil in 2008, one is contracted until 2012 and two each are contracted until 2013, 2014 and 2015. In late 2007, Petrobras announced the discovery of an ultra-deep Atlantic Ocean field with as much as 8 billion barrels of crude oil. In early 2008, Petrobras also announced the discovery of a large natural gas reserve off the coast of Rio de Janeiro that may more than equal the size of the crude oil discovery. We expect the Brazilian floater market to remain strong during 2008.

North Sea . Effective semisubmersible utilization remains at 100 percent in the North Sea where we have three semisubmersible rigs in the U.K. and one semisubmersible unit in Norway. The current contract for one of our four rigs in the North Sea extends until the second quarter of 2009, and the other three rigs have term contracts that extend into 2010.
Australia/Asia/Middle East/Mediterranean . We currently have five semisubmersible rigs and one jack-up unit operating in the Australia/Asia market, and three jack-up rigs and one semisubmersible rig located in the Middle East/Mediterranean sector. During the fourth quarter of 2007, the semisubmersible Ocean General received a Letter of Intent, or LOI, for two years of work in Vietnam at a dayrate in the low $280,000s. We believe that the Australia/Asia/Middle East and Mediterranean floater markets will remain strong during 2008.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of February 7, 2008, October 25, 2007 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007) and February 19, 2007 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2006) and reflects both firm commitments (typically represented by signed contracts), as well as previously-disclosed LOIs. An LOI is subject to customary conditions, including the execution of a definitive agreement. Contract drilling backlog is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 95-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables.

General
Our revenues vary based upon demand, which affects the number of days our fleet is utilized and the dayrates earned. When a rig is idle, no dayrate is earned and revenues will decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher dayrates, we may mobilize our rigs from one market to another. However, during periods of mobilization, revenues may be adversely affected. As a response to changes in demand, we may withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease or increase revenues, respectively.
The two most significant variables affecting revenues are dayrates for rigs and rig utilization rates, each of which is a function of rig supply and demand in the marketplace. As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of available rigs, and vice versa. Demand for drilling services is dependent upon the level of expenditures set by oil and gas companies for offshore exploration and development, as well as a variety of political and economic factors. The availability of rigs in a particular geographical region also affects both dayrates and utilization rates. These factors are not within our control and are difficult to predict.
We recognize revenue from dayrate drilling contracts as services are performed. In connection with such drilling contracts, we may receive fees (either lump-sum or dayrate) for the mobilization of equipment. We earn these fees as services are performed over the initial term of the related drilling contracts. We defer mobilization fees received, as well as direct and incremental mobilization costs incurred, and amortize each, on a straight-line basis, over the term of the related drilling contracts (which is the period estimated to be benefited from the mobilization activity). Straight-line amortization of mobilization revenues and related costs over the term of the related drilling contracts (which generally range from two to 60 months) is consistent with the timing of net cash flows generated from the actual drilling services performed. Absent a contract, mobilization costs are recognized currently.
From time to time, we may receive fees from our customers for capital improvements to our rigs. We defer such fees and recognize them into income on a straight-line basis over the period of the related drilling contract as a component of contract drilling revenue. We capitalize the costs of such capital improvements and depreciate them over the estimated useful life of the improvement.
We receive reimbursements for the purchase of supplies, equipment, personnel services and other services provided at the request of our customers in accordance with a contract or agreement. We record these reimbursements at the gross amount billed to the customer, as “Revenues related to reimbursable expenses” in our Consolidated Statements of Operations included in Item 8 of this report.
Operating Income. Our operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Our operating expenses represent all direct and indirect costs associated with the operation and maintenance of our drilling equipment. The principal components of our operating costs are, among other things, direct and indirect costs of labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and maintenance costs represent the most significant components of our operating expenses. In general, our labor costs increase primarily due to higher salary levels, rig staffing requirements and costs associated with labor regulations in the geographic regions in which our rigs operate. We have experienced and continue to experience upward pressure on salaries and wages as a result of the strong offshore drilling market and increased competition for skilled workers. In response to these market conditions we have implemented retention programs, including increases in compensation.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the drilling unit is performing, as well as the age and condition of the equipment and the regions in which our rigs are working.
Operating expenses generally are not affected by changes in dayrates, and short-term reductions in utilization do not necessarily result in lower operating expenses. For instance, if a rig is to be idle for a short period of time, few decreases in operating expenses may actually occur since the rig is typically maintained in a prepared or “ready-stacked” state with a full crew. In addition, when a rig is idle, we are responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically costs of the operator when a rig is under contract. However, if the rig is to be idle for an extended period of time, we may reduce the size of a rig’s crew and take steps to “cold stack” the rig, which lowers expenses and partially offsets the impact on operating income. We recognize, as incurred, operating expenses related to activities such as inspections, painting projects and routine overhauls that meet certain criteria and which maintain rather than upgrade our rigs. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Higher depreciation expense decreases operating income in periods subsequent to capital upgrades.
Periods of high, sustained utilization may result in cost increases for maintenance and repairs in order to maintain our equipment in proper, working order. In addition, during periods of high activity and dayrates, higher prices generally pervade the entire offshore drilling industry and its support businesses, which cause our costs for goods and services to increase.
Our operating income is negatively impacted when we perform certain regulatory inspections, which we refer to as a 5-year survey, or special survey, that are due every five years for each of our rigs. Operating revenue decreases because these surveys are performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance costs may be required resulting from the survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year.
In addition, operating income may be negatively impacted by intermediate surveys, which are performed at interim periods between 5-year surveys. Intermediate surveys are generally less extensive in duration and scope than a 5-year survey. Although an intermediate survey may require some downtime for the drilling rig, it normally does not require dry-docking or shipyard time, except for rigs located in the U.K. and Norwegian sectors of the North Sea.
During 2008, we expect 12 rigs in our fleet to undergo 5-year or intermediate surveys at an estimated aggregate cost of approximately $45 million, including estimated mobilization costs, but excluding any resulting repair and maintenance costs, which could be significant. Costs of mobilizing our rigs to shipyards for scheduled surveys, which were a major component of our survey-related costs during 2007, are indicative of higher prices commanded by support businesses to the offshore drilling industry. We expect mobilization costs to be a significant component of our survey-related costs in 2008.
For physical damage due to named windstorms in the U.S. Gulf of Mexico, as of the date of this report our deductible is $75.0 million per occurrence (or lower for some rigs if they are declared a constructive total loss) with an annual aggregate limit of $125.0 million. Accordingly, our insurance coverage for all physical damage to our rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico for the policy period ending April 30, 2008 is limited to $125.0 million. If named windstorms in the U.S. Gulf of Mexico cause significant damage to our rigs or equipment or to the property of others for which we may be liable, it could have a material adverse effect on our financial position, results of operations and cash flows.

Critical Accounting Estimates
Our significant accounting policies are included in Note 1 “General Information” to our Consolidated Financial Statements in Item 8 of this report. Judgments, assumptions and estimates by our management are inherent in the preparation of our financial statements and the application of our significant accounting policies. We believe that our most critical accounting estimates are as follows:
Property, Plant and Equipment. We carry our drilling and other property and equipment at cost. Maintenance and routine repairs are charged to income currently while replacements and betterments, which meet certain criteria, are capitalized. Depreciation is amortized up to applicable salvage values by applying the straight-line method over the remaining estimated useful lives. Our management makes judgments, assumptions and estimates regarding capitalization, useful lives and salvage values. Changes in these judgments, assumptions and estimates could produce results that differ from those reported.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following discussion should be read in conjunction with our unaudited consolidated financial statements (including the notes thereto) included elsewhere in this report and our audited consolidated financial statements and the notes thereto, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2007. References to “Diamond Offshore,” “we,” “us” or “our” mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.
We are a leader in deep water drilling with a fleet of 46 offshore drilling rigs. Our fleet currently consists of 30 semisubmersibles, 15 jack-ups and one drillship. During the third quarter of 2008, one of our U.S. Gulf of Mexico jack-ups, the Ocean Tower , was damaged as a result of Hurricane Ike, losing its derrick, drill floor and drill floor equipment. We anticipate that the unit will be out of service for repairs through the third quarter of 2009.
Overview
Industry Conditions
The growing global economic crisis created an environment of uncertainty during the third quarter of 2008 that has continued in the fourth quarter of 2008. The price of crude oil fell from $142 per barrel at the beginning of the period to $100 per barrel at the close, and was trading in the mid-$60s range near the end of October. At the same time, reported dayrates for offshore rigs continued to rise, setting records for both the current fleet and new-build rigs, as well as U.S. Gulf of Mexico, or GOM, jack-ups. Additionally, we added to our floater backlog during the third quarter. We are unable to predict the impact on our business of a continued decline in commodity prices and the global economy. Possible negative impacts, among others, could include a decline in dayrates for new contracts, and a slowing in the pace of new contract activity.
Floaters
The majority of our intermediate and high-specification floater rigs are nearly fully contracted for the remainder of 2008, and 97% of our floater equipment is contracted for 2009. Additionally, contracts for 77% of our floating rigs extend at least until 2010, with 8% of our floating units having contracts extending into the 2014-2015 timeframe. However, during the third quarter of 2008 a customer canceled a letter of intent, or LOI, on the Ocean Star because of infrastructure damage to the customer’s production system caused by hurricanes Gustav and Ike. At the same time, there is currently high customer demand for multi-year contracts for our floater fleet, particularly for those rigs such as the Ocean Star with near-term availability. Although there are a large number of new-build floaters under construction, approximately two-thirds of those units are already under contract and therefore only a limited number of new rigs are available to impact the market.
International Jack-ups
The industry’s jack-up market is divided between an international sector and a U.S. sector, with the international sector generally characterized by contracts of longer duration and higher prices, compared to the generally shorter term and lower priced domestic sector. To date in 2008, we have seen relatively steady demand for jack-ups in the international sector with generally static dayrates. However, with less than 20% of the new-build jack-up order book under contract, it is possible that jack-up rig supply could be of concern in the international sector during 2009 and beyond.
U.S. Gulf of Mexico Jack-ups
In the domestic jack-up sector, higher natural gas prices and tighter rig supply allowed our domestic jack-up fleet to experience improved utilization and dayrates during the first three quarters of 2008, compared to the same period in 2007. Although natural gas prices have declined from earlier highs, to date, the market remains strong for our active domestic jack-up units, with the Ocean Summit recently signing a one-well contract at a near-record dayrate for 300-ft. GOM units of $140,000. All six of our active GOM jack-up rigs are currently contracted, and two of them are committed into the first quarter of 2009.

Contract Drilling Backlog
The following table reflects our contract drilling backlog as of October 23, 2008, February 7, 2008 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2007) and October 25, 2007 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007) and reflects both firm commitments (typically represented by signed contracts), as well as previously-disclosed LOIs. An LOI is subject to customary conditions, including the execution of a definitive agreement, and as such may not result in a binding contract. Contract drilling backlog is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 95-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys.

Casualty Loss
In September 2008, the Ocean Tower sustained significant damage during Hurricane Ike, which impacted the Gulf of Mexico and the upper Texas and Louisiana Gulf coasts. The Ocean Tower lost its derrick, drill floor and drill floor equipment during the hurricane, and we expect the drilling rig to be out of drilling service through the third quarter of 2009. We have not yet made a final assessment of the estimated costs to repair the Ocean Tower nor have we determined whether or not we will have an insurable loss related to this rig. During the third quarter of 2008, we wrote off the net book value of the derrick, drill floor and drill floor equipment for the Ocean Tower of approximately $2.6 million and accrued $3.7 million in estimated salvage costs for the recovery of equipment from the ocean floor. The aggregate of these items is reflected in “Casualty Loss” in our Consolidated Statements of Operations for the three and nine months ended September 30, 2008.
We are currently assessing damages to our remaining drilling fleet within the impacted areas, as well as our shorebase facilities in Louisiana; however, we do not believe that it is likely that we will have an insurable loss as it relates to this portion of our drilling fleet and shorebase facilities.
General
Our revenues vary based on the number of days our fleet is utilized and the dayrates earned. Utilization and dayrates earned are a function of global and regional balance between supply of rigs and demand. When a rig is idle, no dayrate is earned and revenues will decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher dayrates, we may mobilize our rigs from one market to another. However, during periods of mobilization, revenues may be adversely affected. As a response to changes in the balance of supply and demand, we may withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease or increase revenues, respectively.
The two most significant variables affecting revenues are dayrates for rigs and rig utilization rates, each of which is a function of rig supply and demand in the marketplace. As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of available rigs, and vice versa. Demand for drilling services is dependent upon the level of expenditures set by oil and gas companies for offshore exploration and development, as well as a variety of political and economic factors. The availability of rigs in a particular geographical region also affects both dayrates and utilization rates. These factors are not within our control and are difficult to predict.
Operating Income. Our operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Our operating expenses represent all direct and indirect costs associated with the operation and maintenance of our drilling equipment. The principal components of our operating costs are, among other things, direct and indirect costs of labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and maintenance costs represent the most significant components of our operating expenses. In general, our labor costs increase primarily due to higher salary levels, rig staffing requirements, and costs associated with labor regulations in the geographic regions in which our rigs operate. We have experienced and continue to experience upward pressure on salaries and wages as a result of the strengthening offshore drilling market and increased competition for skilled workers. In response to these market conditions we have implemented retention programs, including increases in compensation.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the drilling unit is performing, as well as the age and condition of the equipment and the regions in which our rigs are working.
Operating expenses generally are not affected by changes in dayrates, and short-term reductions in utilization do not necessarily result in lower operating expenses. For instance, if a rig is to be idle for a short period of time, few decreases in operating expenses may actually occur since the rig is typically maintained in a prepared or “ready-stacked” state with a full crew. In addition, when a rig is idle, we are responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically costs of the operator when a rig is under contract. However, if the rig is to be idle for an extended period of time, we may reduce the size of a rig’s crew and take steps to “cold stack” the rig, which lowers expenses and partially offsets the impact on operating income. We recognize, as incurred, operating expenses related to activities such as inspections, painting projects and routine overhauls that meet certain criteria and which maintain rather than upgrade our rigs. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Higher depreciation expense decreases operating income in periods subsequent to capital upgrades.
Periods of high, sustained utilization may result in cost increases for maintenance and repairs in order to maintain our equipment in proper, working order. In addition, during periods of high activity and dayrates, higher prices generally pervade the entire offshore drilling industry and its support businesses, which cause our costs for goods and services to increase.
Our operating income is negatively impacted when we perform certain regulatory inspections, which we refer to as a 5-year survey, or special survey, that are due every five years for each of our rigs. Operating revenue decreases because these surveys are performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance costs may be required resulting from the survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.
In addition, operating income may be negatively impacted by intermediate surveys, which are performed at interim periods between 5-year surveys. Intermediate surveys are generally less extensive in duration and scope than a 5-year survey. Although an intermediate survey may require some downtime for the drilling rig, it normally does not require dry-docking or shipyard time, except for rigs located in the United Kingdom, or U.K., and Norwegian sectors of the North Sea.
During the last quarter of 2008, we expect that six of our rigs will undergo 5-year regulatory inspections and will be out of service for approximately 266 days in the aggregate, including downtime for planned maintenance projects. We expect to spend an additional approximately 308 days during the remainder of 2008 for an intermediate survey, the mobilization of rigs, completion of contract modifications, extended maintenance projects not performed in conjunction with regulatory surveys and repairs to the Ocean Tower . During 2009, we expect that an additional five of our rigs will undergo 5-year surveys and will be out of service for approximately 280 days in the aggregate. We also expect to spend an additional approximately 921 days during 2009 for intermediate surveys, the mobilization of rigs, contract modifications for international contracts, extended maintenance projects and completion of repairs to the Ocean Tower . In addition, we expect the Ocean Bounty to be taken out of service at some time after the first quarter of 2009 for a water depth upgrade and repowering project. We expect these projects to take approximately one year to complete and will extend to 2010. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig mobilizations and other shipyard projects. See “ – Overview – Contract Drilling Backlog.”)
Under our current insurance policy that expires on May 1, 2009, our deductible for physical damage is $75.0 million per occurrence (or lower for some rigs if they are declared a constructive total loss). For physical damage due to named windstorms in the U.S. Gulf of Mexico, there is an annual aggregate limit of $125.0 million. Accordingly, our insurance coverage for all physical damage to our rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico for the policy period ending May 1, 2009 is limited to $125.0 million. If named windstorms in the U.S. Gulf of Mexico cause significant damage to our rigs or equipment or to the property of others for which we may be liable, it could have a material adverse effect on our financial position, results of operations and cash flows.

Critical Accounting Estimates
Our significant accounting policies are discussed in Note 1 of our notes to consolidated financial statements included in Item 1 of Part I of this report and in Note 1 of our notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. There were no material changes to these policies during the nine months ended September 30, 2008.

Results of Operations
Although we perform contract drilling services with different types of drilling rigs and in many geographic locations, there is a similarity of economic characteristics among all our divisions and locations, including the nature of services provided and the type of customers for our services. We believe that the combination of our drilling rigs into one reportable segment is the appropriate aggregation in accordance with the Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 131, “Disclosures about Segments of an Enterprise and Related Information.” However, for purposes of this discussion and analysis of our results of operations, we provide greater detail with respect to the types of rigs in our fleet and the geographic regions in which they operate to enhance the reader’s understanding of our financial condition, changes in financial condition and results of operations.
Three Months Ended September 30, 2008 and 2007
Comparative data relating to our revenue and operating expenses by equipment type are listed below. We have reclassified certain amounts applicable to the prior period to conform to the classifications we currently follow.

Continued high overall utilization and historically high dayrates for our floater fleet contributed to an overall increase in our net income of $105.1 million, or 51%, to $310.6 million in the third quarter of 2008 compared to $205.5 million in the same period of 2007. In many of the floater markets in which we operate, average dayrates increased as our rigs operated under contracts at higher dayrates than those earned during the third quarter of 2007. The market for our jack-up rigs in the GOM improved during the third quarter of 2008 as evidenced by higher utilization compared to the third quarter of 2007; however, our GOM jack-up fleet earned lower average dayrates in the low $80,000 range compared to the third quarter of 2007 when rates for our GOM jack-ups averaged in the high $80,000 range. Total contract drilling revenues in the third quarter of 2008 increased $253.7 million, or 40%, to $881.9 million compared to $628.2 million in the same period a year earlier.
Total contract drilling expenses increased $34.0 million, or 12%, in the third quarter of 2008, compared to the same period in 2007. Overall cost increases for maintenance and repairs between the 2008 and 2007 periods reflect the impact of high, sustained utilization of our drilling units across our fleet, higher maintenance costs, contract preparation and mobilization costs. Our results for the third quarter of 2008 also include normal operating costs for our newly constructed jack-up rigs, the Ocean Shield and Ocean Scepter , that began operating offshore Malaysia in the second quarter of 2008 and offshore Argentina during the third quarter of 2008, respectively. The increase in overall operating and overhead costs also reflects the impact of higher prices throughout the offshore drilling industry and its support businesses, including higher costs associated with hiring and retaining skilled personnel for our worldwide offshore fleet.
Depreciation expense increased $14.4 million to $72.0 million during the third quarter of 2008, or 25% compared to the third quarter of 2007, primarily due to a higher depreciable asset base.

CONF CALL

Les Van Dyke

Morning. Thank you for joining us. With me on the call today are Larry Dickerson, President and Chief Executive Officer; Gary Krenek, Senior Vice President and Chief Financial Officer; and John Gabriel, Senior Vice President Contracts and Marketing.

Before Larry begins his remarks I should remind you the statements made during this conference call may constitute forward-looking statements and are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Forward-looking statements include but are not limited to discussions about future revenues and earnings, capital expenditures, industry conditions and competition, days that 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 reports filed with the Securities and Exchange Commission. Given these concerns, investors and analysts should not place undue reliance on forward-looking statements. The company expressly disclaims any obligation to release publicly any updates to any forward-looking statements to reflect any change in the company's expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. And with that, I'll turn the meeting over to Larry.

Larry Dickerson

Thank you, Les. And welcome everyone to our third quarter conference call. I'm sure, I'll be making some opening remarks about Diamond Offshore and the quarter and I will be followed by Gary Krenek, who will go through some of the details numbers that are behind that, with emphasis, I guess, and looking forward to the fourth quarter.

I'm sure in the overall macro-environment, where people are concerned, obviously, about the price of oil and the price of not only our shares but the entire oil field services complex and entire stock market, that those are the big macro questions that I'm sure we will take. I'm not sure that I can specifically address those but I can talk about some of the positive things that are going on at Diamond Offshore which might give you some viewpoint of how we view the particular market.

Obviously, let me start with our dividend and I'll return to that in a minute but the increase that we made in our dividend is a continuation of what we've emphasized as our dividend strategy. So the combined $2 a share dividend, which is a 46% increase over the combined dividends that we paid in the previous four quarters, was something that we were able to make and it's based, to a large degree, upon where we are in the market, that we have over $11 billion worth of backlog, and that we continue to see positive indications of demand for drilling rigs that we possess. Obviously, the market is ensure and you – and the decline in the price of oil will have some impact, but if we look – we announced in the press release a new contract at what for us is a record day rate for a deep water unit, the Ocean Valiant, which would be heading over to Angola in West Africa for Total, signed a minimum two-year commitment and this was signed this Monday. We had received an LOI several weeks before that but we wanted to make sure that we made the announcement at the point in time that we had the complete contract in place since there were some open issues there.

But I think that that shows that, certainly for the majors, at least for Total, that their programs are such that they are willing to go forward and willing to go forward with strong commitments. As we indicated in our press release, the opening day rate, which you can do the math and see that it's in excess of – well in excess of $600,000 a day, the day rate can decrease if they take that commitment and go from either a two-year commitment to a two and a half year commitment or a three-year commitment.

The other thing I would point out would be that we've seen continued strength in the jack-up market. I think recently Rowan announced a number of commitments that went from a number of their (inaudible) rigs, which is an area that we don't participate in, on through some of the 300 and 350 foot units in the Gulf of Mexico which we do participate in. And we have also seen commitments that are at increasing day rates and those have been signed and committed in the last four to six weeks. So, again, even in the face of declining product prices and the uncertainty out there we see strength.

Certainly, let me return to the one thing that people were concerned about when we, in our previous fleet status report, indicated that an LOI that we previously received and had disclosed as a future commitment was not carried forward to contract status. The customer in that case indicated to us that due to cash flow disruptions from both Gustav and Ike to their facilities and the pipeline serving those facilities, their cash flow did not permit them to carry forward with that particular commitment. And so, we got that data out the door as soon as possible to make sure the market was aware of that. And that we have not disclosed the customer but it was not, I repeat, was not the current contracted customer Anadarko.

And the Ocean Stars will be finishing up its current drilling well sometime toward the end of the year and this will be the first available 6,000 foot unit, in quite in – looking quite sometime in the future, that will be available for re-contracting and we've had terrific interest on this from a number of customers. So, this closed the, obviously, the concern that people have about cash flow impacts in this particular market but again, it's the type of rig that we see lots of our strength.

So those are the general positive market comments. Let me talk a minute about some of the occurrences within the quarter. Our quarterly results were burdened by two items that certainly were not things that we looked at when we went into the quarter. One, hurricane Ike caused some damage to the jack-up Ocean Tower. Ocean Tower was very close in a path in the Vermillion area where Ike apparently caused free jack-ups to sink. But in our particular case, the derrick and the cantilever drilling package went over the side. I was on the rig yesterday afternoon, and the rig looks great except for not having a derrick and drilling package, and its astounding to all of us that cranes and other parts of the rig on the surviving hull were largely unaffected yet the derrick went over the side. Of course, we had no one on board, so we don't have a precise understanding at this point. We did have some data gathering which we will be analyzing.

But, any case that caused a $6.3 million loss. We had a very low net book value for the equipment that was still on the rig of approximately $2.6 million and then we accrued $3.7 million towards our deductible for removal of wreck. Next spring, when the weather settles down, we expect to return to the site and lift up the damaged pieces.

The Ocean Tower itself is scheduled for repairs. We are in the midst of bidding those repairs out so I can't tell you an exact price. Our effective deductible on that unit was right at $70 million. So that would be the maximum that we will spend and I would expect it would be well towards that number if not over that number but I can't give you any details on that at this point.

The unfortunate thing is that due to all the activity in the sector for new builds across-the-board, the derrick manufacturers are backlogged and we will not be able to receive a derrick for eight or nine months and then we'll go through an installation period. So, we look at that rig as being off contract for approximately a year. Surprisingly enough, the rig was not actually drilling at the time that was engaged in some hurricane recovery operations for Chevron, and so they continued use the rig even absence drilling package for a portion of September and on into October. It is idle at the moment and they paid us a rate of $75,000 a day for the rig in its current state, but we don't see much opportunities like that to come into the future. So, we will be preparing the rig for the modifications it will make to get it back to service.

And then the final thing that we had not anticipated is our currency loss, and Gary can go through more details on that but our currency loss for the quarter was just a hair under $30 million – $29 million. We have taken forward contracts on our key currencies for about the past three or four years and with the gradual decline in the dollar, although we're not with hedge accounting and therefore we recognize currency gains or losses, we typically will have been recognizing a slight gain in each quarter. For the two and a half years, that had been about $30 million of gain, however that was offset, or had attempted to offset each quarter's pick up in the cost of our drilling expenses which were denominated in those underlying quarters. So, there was sort of a matching procedure that went on there but what has happened with the huge improvement in the value of the dollar relative to these currencies, and the currencies that we deal with are UK pounds, the peso from Mexico, Australian dollars, and Brazilian p-eyes [ph], and a little bit of Norwegian krone.

We had to, in effect, mark-to-market all of our future hedge positions which stretch out to the middle of next year. So, the current quarter's loss chiefly reflects all of those future losses having been mark-to-market. Theoretically, if the dollar stayed in that particular level, then we would offset that in the future quarters by a decrease in our foreign currency denominated expense, but obviously, the currency can move one way or the other and in fact, for the first couple of weeks of October, it has continued to – the dollar's continued to strengthen. So, that's where that is, but that's essentially we think a mark-to-market timing difference that would be offset by decreases in our drilling expense although all that could reverse it if the dollar moves in a different direction and I have no idea which way that's going to go.

So that kind of covers what's happened in the quarter and how we see the market, and again, I'll come right back to the dividend, I think, our decision to raise the dividend, I think, is a very strong reflection of the strength that we see in Diamond Offshore's position. So, Gary?

Gary Krenek

Thanks, Larry. As before, I'd like to spend a little time on the results we just reported on the third quarter and as Larry said, to give some guidance on what we expect to see financially in the fourth quarter. With regards to the third quarter results, Larry talked about two of the three more significant items are casualty loss and the hurricane and the currency loss. So, I'm not going to really spend any time on that since he went through that. The only thing I would add is on the repairs for the Ocean Tower, as Larry said, we expect to spend as much as $70 million. When we spend those moneys in 2009, those will be capital expenditures so they will not hit P&L but will be accounted for as capital. The other significant item that many of you may have a question about is contract drilling expenses which were $314 million for the quarter. That is higher than the $273 million that we had previously reported last quarter but below the $335 to $340 million that we guided to in our last conference call.

The increase over Q2 was due to cost incurred by seven of our rigs which spent part of the third quarter in shipyards undergoing planned regulatory surveys. However, because of the timing, approximately $15 million of the cost that we had anticipated and guided to did not occur in Q3 but rather or will now be rolled over and spent on the fourth-quarter. The remaining favorable variance comparing our previous guidance to actuals can be mainly attributed to our ongoing efforts to control costs.

Now looking forward with respect to contract drilling expenses in this upcoming quarter, we gave out an average annual per day cost that we expect to incur by rig class and location at the beginning of the year. To remind everyone again that we said because these rights were the expected cost for the entire year in a rising cost environment, we expected to incur costs slightly below those rates during the first half of the year and slightly above those rates on the second half in order to reach that average cost. And at this point, it appears that that guidance was accurate and that is what is occurring. So, in order to compute normal daily operating cost for the fourth quarter, you need to use those annual rates that we gave out earlier but escalate them slightly for Q4.

Now, in addition to these normal daily operating costs, we expect to incur a combined total of approximately $50 million in additional survey and related cost to complete the surveys For the Ambassador, Valiant, Drake, and Rover which we've begun in the third quarter, and also for survey cost related to the Ocean Nomad and Ocean Princess which will be done in their entirety in Q4.

This $50 million is inclusive of the amounts that we have previously expected to spend in Q3 but have now been rolled over into Q4. These rigs are expected to spend a combined total of 266 days off day rate doing the survey work in this upcoming quarter. We also expect to incur another $3 to $5 million above and beyond normal operating cost for two additional rigs that will spend time in the shipyard for non-survey related work, and we'll also book and additional $11 million related to amortization and differed mobilization cost. All told, this totals to approximately $335 million to $340 million of contract drilling cost which we expect incur in the fourth quarter.

Having said that, this estimation, of course, will change if there is a change in our rig survey time and has happened in this previous quarter. And I'd like to take this opportunity to remind everyone that we file an update of rig status report on our website every two weeks. Changes in survey downtime, dates, contract rollover dates, etc., can be found in that report. I would also like to point out that what I've been talking about with regard to contract drilling cost is the line item in our income statement that is labeled exactly that and does not include reimbursable expenses which is a separate line on the P&L statement. Reimbursable expenses are driven by the amounts of consumables we were asked to purchase by our customers and are offset by approximately the same amount of reimbursable revenues.

And in quickly, depreciation and interest expense which we normally discuss should remain relatively flat going into the next quarter, and we expect our tax rate to end the year somewhere between 29.5% and 30%.

With that, I'll turn it back over to Larry.

Larry Dickerson

Okay, so I think, we're ready for questions which we will take. Operator, we're ready to begin our questions.


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