MORE INQUIRIES FOR SECOND GENERATION
"We are beginning to see more inquiries in the second-generation market," said Diamond CFO Gary Krenek. "We believe that market is beginning to turn for us. We've already worked some of our second-gens in that jackup water depth. The rates are so high on those deep jackups that it makes sense to bring in a semi if you can."

Diamond holds fast to its belief that upgrading its existing semis, rather than building new ones, offers a better rate of return on capital invested. Analyst Lewis Krepps of Frost Securities agrees. "If you go back in history and look at which companies have gotten the best rates of return, it's the companies that have bought the assets cheap and refurbished them. Anyone who newbuilds gets a rate of return of eight to ten percent. But if you refurb a rig, your rate is fifteen to twenty-five percent."

The company's latest upgrade project is the Ocean Baroness, a Victory-class semi which will be refitted on speculation at Keppel FELS in Singapore for about $180 million. Diamond has recently upgraded three other Victory-class units for water depths of between 3,500 feet to 5,000 feet, and the Baroness will have 6,000-foot capability. The company hopes to push the rig as a development tool in the U.S. Gulf or West Africa. Diamond is currently marketing the Ocean Baroness, and, after a contract for it is secured, the company plans to move another Victory-class rig into conversion along with others in sequence. But the company is also itching to push its five Aker-design rigs into conversion.

Diamond can certainly afford to convert rigs on spec. At the end of the second quarter, the company had $947 million in cash and securities in the bank.