Higher Rig Day Rates at Diamond Offshore Drilling

• The Company: Diamond Offshore Drilling, the world's second-largest offshore contract oil and natural gas driller.
• The Filing: FORM 8-K filed with the SEC on October 23, 2008.
• The Finding: Even amidst declining energy prices and the uncertainty in the credit markets, the recent Diamond Offshore Drilling contract with Total E&P Angola for its fourth generation deepwater semi-submersible, the Ocean Valiant, at record rates in excess of $620,000 per day, signals major oil and gas exploration companies are still willing to commit and more forward with drilling plans.

In July, the company signed a letter of intent at an expected day rate of approximately $520,000 for its deep water unit Ocean Star, under current contract with Anadarko at a day rate of about $410,000 until November 2008.

Chief Executive Larry Dickerson told analysts on the company's third-quarter 2008 earnings call that its offshore customers appear less vulnerable to lower oil prices, save for some of the lower-return, more mature markets in the world, such as the North Sea and shallow regions in the Gulf of Mexico. In addition, most of the company's fleet is contracted to 2010.

The Question: The lock-up language in existing contracts is unknown. Should the price of oil find a floor below $65 a barrel, can customers re-negotiate (for lower day rate prices) or cancel new contracts without financial penalty?