Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


							March 31,			December 31,
	September 30, 2013			December 31, 2012			2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	438,794		$	335,432		$	420,140		$	347,011
Marketable securities		800,204			1,150,158			1,175,135			1,750,053
Accounts receivable, net of allowance for bad debts		424,808			499,660			416,177			469,355
Prepaid expenses and other current assets		142,152			136,099			146,510			143,997
Assets held for sale		11,594			11,594			7,694			7,694

Total current assets		1,817,552			2,132,943			2,165,656			2,718,110
Drilling and other property and equipment, net of accumulated depreciation		5,331,470			4,864,972			5,954,496			5,467,227
Other assets		193,586			237,371			207,835			206,097

Total assets	$	7,342,608		$	7,235,286		$	8,327,987		$	8,391,434

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	86,533		$	96,631		$	92,924		$	94,151
Accrued liabilities		354,232			324,434			383,121			370,671
Taxes payable		26,175			64,481			28,442			30,806
Current portion of long-term debt		249,935			—			249,973			249,954

Total current liabilities		716,875			485,546			754,460			745,582
Long-term debt		1,246,321			1,496,066			2,244,262			2,244,189
Deferred tax liability		532,729			490,946			531,988			525,541
Other liabilities		182,347			186,334			219,186			238,864

Total liabilities		2,678,272			2,658,892			3,749,896			3,754,176

Commitments and contingencies (Note 8)
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock (par value $0.01, 25,000,000 shares authorized, none issued and outstanding)		—			—			—			—
Common stock (par value $0.01, 500,000,000 shares authorized; 143,952,248 shares issued and 139,035,448 shares outstanding at September 30, 2013; 143,948,370 shares issued and 139,031,570 shares outstanding at December 31, 2012)		1,440			1,439
Common stock (par value $0.01, 500,000,000 shares authorized; 143,952,248 shares issued and 137,170,137 shares outstanding at March 31, 2014; 143,952,248 shares issued and 139,035,448 shares outstanding at December 31, 2013)								1,440			1,440
Additional paid-in capital		1,986,693			1,983,957			1,990,137			1,988,720
Retained earnings		2,791,242			2,702,915			2,784,249			2,761,161
Accumulated other comprehensive gain (loss)		(626	)		2,496			3,042			350
Treasury stock, at cost (4,916,800 shares of common stock at September 30, 2013 and December 31, 2012)		(114,413	)		(114,413	)
Treasury stock, at cost (6,782,111 and 4,916,800 shares of common stock at March 31, 2014 and December 31, 2013, respectively)								(200,777	)		(114,413	)

Total stockholders’ equity		4,664,336			4,576,394			4,578,091			4,637,258

Total liabilities and stockholders’ equity	$	7,342,608		$	7,235,286		$	8,327,987		$	8,391,434

The accompanying notes are an integral part of the consolidated financial statements.


													Three Months Ended
	Three Months Ended September 30,						Nine Months Ended September 30,						March 31,
	2013			2012			2013			2012			2014			2013
Revenues:
Contract drilling	$	690,741		$	714,027		$	2,135,612		$	2,195,443		$	685,308		$	699,973
Revenues related to reimbursable expenses		15,424			15,114			58,312			40,528			24,116			29,768

Total revenues		706,165			729,141			2,193,924			2,235,971			709,424			729,741

Operating expenses:
Contract drilling, excluding depreciation		419,488			357,281			1,163,618			1,159,635			369,790			375,094
Reimbursable expenses		14,904			14,563			56,998			39,351			23,666			29,289
Depreciation		97,143			99,207			291,107			300,069			107,011			96,821
General and administrative		15,240			13,476			48,490			49,803			22,827			16,815
Bad debt expense (recovery)		22,563			—			22,563			(1,018	)
Gain on disposition of assets		(525	)		(208	)		(2,789	)		(79,285	)		(147	)		(2,004	)

Total operating expenses		568,813			484,319			1,579,987			1,468,555			523,147			516,015

Operating income		137,352			244,822			613,937			767,416			186,277			213,726
Other income (expense):
Interest income		136			773			1,024			4,052			408			617
Interest expense		(1,693	)		(8,720	)		(17,713	)		(36,780	)		(18,155	)		(8,069	)
Foreign currency transaction loss		(4,556	)		(1,860	)		(3,949	)		(881	)
Foreign currency transaction gain (loss)														(1,178	)		159
Other, net		326			(168	)		746			(767	)		327			(254	)

Income before income tax expense		131,565			234,847			594,045			733,040			167,679			206,179
Income tax expense		(36,817	)		(56,661	)		(137,974	)		(168,224	)		(21,869	)		(30,190	)

Net income	$	94,748		$	178,186		$	456,071		$	564,816		$	145,810		$	175,989

Income per share:
Basic	$	0.68		$	1.28		$	3.28		$	4.06

Diluted	$	0.68		$	1.28		$	3.28		$	4.06
Earnings per share, Basic and Diluted													$	1.05		$	1.27

Weighted-average shares outstanding:
Shares of common stock		139,035			139,030			139,034			139,029			138,469			139,032
Dilutive potential shares of common stock		30			23			38			17			4			49

Total weighted-average shares outstanding		139,065			139,053			139,072			139,046			138,473			139,081

Cash dividends declared per share of common stock	$	0.875		$	0.875		$	2.625		$	2.625		$	0.875		$	0.875

The accompanying notes are an integral part of the consolidated financial statements.


	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended March 31,
	2013			2012			2013			2012		2014			2013
Net income	$	94,748		$	178,186		$	456,071		$	564,816	$	145,810		$	175,989
Other comprehensive gains (losses), net of tax:
Foreign currency forward exchange contracts:
Unrealized holding gain (loss)		1,615			1,118			(4,901	)		4,024
Reclassification adjustment for loss included in net income		3,622			1,868			1,918			3,445
Derivative financial instruments:
Unrealized holding gain													2,839			283
Reclassification adjustment for loss (gain) included in net income													(177	)		(1,451	)
Investments in marketable securities:
Unrealized holding (loss) gain		(2	)		29			7			18		38			7
Reclassification adjustment for loss (gain) included in net income		(14	)		(28	)		(146	)		56		(8	)		(83	)

Total other comprehensive gain (loss)		5,221			2,987			(3,122	)		7,543		2,692			(1,244	)

Comprehensive income	$	99,969		$	181,173		$	452,949		$	572,359	$	148,502		$	174,745

The accompanying notes are an integral part of the consolidated financial statements.


	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
Operating activities:
Net income	$	456,071		$	564,816		$	145,810		$	175,989
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		291,107			300,069			107,011			96,821
Gain on disposition of assets		(2,789	)		(79,285	)		(147	)		(2,004	)
Loss on foreign currency forward exchange contracts		2,246			5,692
Gain on foreign currency forward exchange contracts								(511	)		(2,435	)
Deferred tax provision		43,414			(6,089	)		4,997			9,994
Accretion of discounts on marketable securities		(584	)		4,461			(144	)		(326	)
Stock-based compensation expense		2,627			3,248			1,417			788
Deferred income, net		(45,600	)		(19,020	)		1,384			(23,085	)
Deferred expenses, net		20,441			58,391			(26,044	)		5,600
Long-term employee remuneration programs		6,617			4,572			2,048			2,209
Other assets, noncurrent		(4,487	)		2,697			(173	)		(4,366	)
Other liabilities, noncurrent		(51	)		2,457			155			(1,612	)
Proceeds from (payments of) settlement of foreign currency forward exchange contracts designated as accounting hedges		(2,246	)		(5,692	)
Proceeds from settlement of foreign currency forward exchange contracts designated as accounting hedges								511			2,435
Bank deposits denominated in nonconvertible currencies								5,016			—
Other		1,418			800			572			463
Changes in operating assets and liabilities:
Accounts receivable		74,965			108,159			53,178			13,760
Prepaid expenses and other current assets		(327	)		(9,350	)		2,961			14,039
Accounts payable and accrued liabilities		25,583			4,961			10,176			6,925
Taxes payable		(10,505	)		68,711			(5,202	)		(19,089	)

Net cash provided by operating activities		857,900			1,009,598			303,015			276,106

Investing activities:
Capital expenditures (including rig construction)		(740,460	)		(514,672	)		(595,314	)		(183,719	)
Proceeds from disposition of assets, net of disposal costs		3,357			136,937			173			2,230
Proceeds from sale and maturities of marketable securities		3,225,062			2,075,106			2,175,021			725,014
Purchases of marketable securities		(2,874,689	)		(2,352,635	)		(1,599,914	)		(724,793	)

Net cash used in investing activities		(386,730	)		(655,264	)		(20,034	)		(181,268	)

Financing activities:
Payment of dividends		(367,945	)		(367,984	)		(122,655	)		(122,298	)
Credit facility arrangement fees		(1	)		(3,646	)
Purchase of treasury stock								(86,364	)		—
Other		138			130			(833	)		137

Net cash used in financing activities		(367,808	)		(371,500	)		(209,852	)		(122,161	)

Net change in cash and cash equivalents		103,362			(17,166	)		73,129			(27,323	)
Cash and cash equivalents, beginning of period		335,432			333,765			347,011			335,432

Cash and cash equivalents, end of period	$	438,794		$	316,599		$	420,140		$	308,109

The accompanying notes are an integral part of the consolidated financial statements.

The unaudited consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries, which we refer to as “Diamond Offshore,” “we,” “us” or “our,” should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 (File No. 1-13926).

As of ~~October 25, 2013,~~April 24, 2014, Loews Corporation owned ~~50.4%~~51.1 % of the outstanding shares of our common stock.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, pursuant to such rules and regulations, they do not include all disclosures required by GAAP for complete financial statements. The consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated balance sheets, statements of operations, statements of comprehensive income and statements of cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently followed. Such reclassifications do not affect earnings.

We consider short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash to be cash equivalents. We had bank deposits denominated in Egyptian pounds totaling $8.5 million and $14.3 million at March 31, 2014 and December 31, 2013, respectively. However, the local currency is not readily convertible into U.S. dollars or other currencies at this time. While we believe that a portion of these amounts will be used to fund local obligations in Egyptian pounds in the short term, we have reported $7.7 million and $12.7 million as “Other assets” in our Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, respectively.

The effect of exchange rate changes on cash balances held in foreign currencies was not material for each of the ~~three and nine-month~~three-month periods ended ~~September 30, 2013~~March 31, 2014 and ~~2012.~~2013.

We classify our investments in marketable securities as available for sale and they are stated at fair value in our Consolidated Balance Sheets. Accordingly, any unrealized gains and losses, net of taxes, are reported in our Consolidated Balance Sheets in “Accumulated other comprehensive gain (loss),” or AOCGL, until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and such adjustments are included in our Consolidated Statements of Operations in “Interest income.” The sale and purchase of securities are recorded on the date of the trade. The cost of debt securities sold is based on the specific identification method. Realized gains or losses, as well as any declines in value that are judged to be other than temporary, are reported in our Consolidated Statements of Operations in “Other income (expense) – Other, net.” See Note 4.5.

We record a provision for bad debts on a case-by-case basis when facts and circumstances indicate that a customer receivable may not be collectible. In establishing these reserves, we consider historical and other factors that predict collectability, including write-offs, recoveries and the monitoring of credit quality. Such provision is reported as a component of “Operating expenses” in our Consolidated Statements of Operations. See Note 2.

Our derivative financial instruments consist of foreign currency forward exchange, or FOREX, contracts which we may designate as cash flow hedges. In accordance with GAAP, each derivative contract is stated in the balance sheet at its fair value with gains and losses reflected in the income statement except that, to the extent the derivative qualifies for and is designated as an accounting hedge, the gains and losses are reflected in income in the same period as offsetting gains and losses on the qualifying hedged positions. Designated hedges are expected to be highly effective, and therefore, adjustments to record the carrying value of the effective portion of our derivative financial instruments to their fair value are recorded as a component of AOCGL in our Consolidated Balance Sheets. The effective portion of the cash flow hedge will remain in AOCGL until it is reclassified into earnings in the period or periods during which the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. We report such realized gains and losses as a component of “Contract drilling, excluding depreciation” expense in our Consolidated Statements of Operations to offset the impact of foreign currency fluctuations in our expenditures in local foreign currencies in the countries in which we operate. See Note 9.11.

Adjustments to record the carrying value of the ineffective portion of our derivative financial instruments to fair value and realized gains or losses upon settlement of derivative contracts not designated as cash flow hedges are reported as “Foreign currency transaction gain (loss)” in our Consolidated Statements of Operations. See Notes 56 and 6.

In 2012, our management adopted a plan to actively market for sale three cold-stacked mid-water semisubmersibles (the Ocean Epoch, the Ocean New Era and the Ocean Whittington) and one cold-stacked jack-up rig (the Ocean Spartan). In connection with the reclassification of these rigs to “Assets held for sale,” we measured the fair value of each rig in the disposal group using a probability-weighted cash flow analysis that utilized significant unobservable inputs, representing a Level 3 fair value measurement, which included assumptions for estimated proceeds that may be received upon disposition of the rig and estimated costs to sell. For our three mid-water semisubmersibles in the disposal group, we determined that, due to the expected resale market for rigs of this type and age, the highest and best use of these rigs would be for sale as scrap. Based on our analyses, we determined that the carrying values of the mid-water semisubmersible rigs in the disposal group were impaired, as the carrying value for each exceeded its aggregate fair value, and recognized an impairment loss in the fourth quarter of 2012. We determined that the carrying value of the Ocean Spartan was not impaired. At both September 30, 2013 and December 31, 2012, we reported “Assets held for sale” aggregating $11.6 million in our Consolidated Balance Sheets. See Note 6.7.

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 upgrade or increase the functionality of our existing equipment and that significantly extend the useful life of an existing asset, are capitalized. Significant judgments, assumptions and estimates may be required in determining whether or not such replacements and betterments meet the criteria for capitalization and in determining useful lives and salvage values of such assets. Changes in these judgments, assumptions and estimates could produce results that differ from those reported. Historically, the amount of capital additions requiring significant judgments, assumptions or estimates has not been significant. During the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and the year ended December 31, ~~2012,~~2013, we capitalized ~~$189.2~~$84.5 million and ~~$220.3~~$302.0 million, respectively, in replacements and betterments of our drilling fleet, resulting from numerous projects ranging from $25,000 to ~~$60~~$30 million per project.

Costs incurred for major rig upgrades and/or the construction of rigs are accumulated in construction work-in-progress, with no depreciation recorded on the additions, until the month the upgrade or newbuild is completed and the rig is ~~placed in service.~~ready for its intended use. Upon retirement or sale of a rig, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are included in our results of operations as “Gain on disposition of assets.” Depreciation is recognized up to applicable salvage values by applying the straight-line method over the remaining estimated useful lives from the year the asset is placed in service. Drilling rigs and equipment are depreciated over their estimated useful lives ranging from three to 30 years.

We account for the purchase of treasury stock using the cost method, which reports the cost of the shares acquired in “Treasury stock” as a deduction from stockholders’ equity in our Consolidated Balance Sheets. Depending on market conditions, we may, from time to time, purchase shares of our common stock in the open market or otherwise. During the three months ended March 31, 2014, we repurchased 1,865,311 shares of common stock at a cost of $86.4 million.

We capitalize interest cost for qualifying construction and upgrade projects. See Note 7.8. A reconciliation of our total interest cost to “Interest expense” as reported in our Consolidated Statements of Operations is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012			Three Months Ended March 31,
	(In thousands)												2014			2013
Total interest cost, including amortization of debt issuance costs	$	22,234		$	19,145		$	71,229		$	62,782		$	34,367		$	23,905
Capitalized interest		(20,541	)		(10,425	)		(53,516	)		(26,002	)		(16,212	)		(15,836	)

Total interest expense as reported	$	1,693		$	8,720		$	17,713		$	36,780		$	18,155		$	8,069

We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as cold stacking a rig or excess spending over budget on a newbuild, construction project or major rig upgrade. ~~There were no~~At both March 31, 2014 and December 31, 2013, we had four cold-stacked rigs, ~~at September 30, 2013 that were not being marketed~~of which one was reported as an “Asset held for ~~sale.~~

Our 5.15% Senior Notes due September 1, 2014, or 5.15% Senior Notes, in the aggregate principal amount of $250.0 million will mature on September 1, 2014. Accordingly, the aggregate $249.9 million accreted value of our 5.15% Senior Notes has been presented as “Current portion of long-term debt”sale” in our Consolidated Balance ~~Sheets at September 30,~~Sheets. We did not record any impairment with respect to our cold-stacked rigs for the three-month periods ended March 31, 2014 and 2013.

Our functional currency is the U.S. dollar. Foreign currency transaction gains and losses are reported as “Foreign currency transaction gain (loss)” in our Consolidated Statements of Operations and include, when applicable, unrealized gains and losses to record the carrying value of our FOREX contracts not designated as accounting hedges, as well as realized gains and losses from the settlement of such contracts. For the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2014 and 2013, we recognized net foreign currency transaction gains (losses) of ~~$(4.6)~~$(1.2) million and ~~$(3.9) million, respectively. For the three-month and nine-month periods ended September 30, 2012, we recognized net foreign currency transaction (losses) of $(1.9) million and $(0.9)~~$0.2 million, respectively. See Note 5.6.

We recognize revenue from dayrate drilling contracts as services are performed. In connection with such drilling contracts, we may receive fees ~~(either~~(on either a lump-sum or ~~dayrate)~~dayrate basis) 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 we estimate 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.

Some of our drilling contracts require downtime before the start of the contract to prepare the rig to meet customer requirements. At times, we may be compensated by the customer for such work ~~(either~~(on either a lump-sum or ~~dayrate)~~dayrate basis). These fees are generally earned as services are performed over the initial term of the related drilling contracts. We defer contract preparation fees received as well as direct and incremental costs associated with the

contract preparation activities and amortize each, on a straight-line basis, over the term of the related drilling contracts (which we estimate to be benefited from the contract preparation activity).

From time to time, we may receive fees from our customers for capital improvements to our rigs (either lump-sum or dayrate). We defer such fees received in “Accrued liabilities” and “Other liabilities” in our Consolidated Balance Sheets and recognize these fees into income on a straight-line basis over the period of the related drilling contract. We capitalize the costs of such capital improvements and depreciate them over the estimated useful life of the improvement.

We record reimbursements received 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, for the gross amount billed to the customer, as “Revenues related to reimbursable expenses” in our Consolidated Statements of Operations.

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, or ASU 2013-11, which eliminates diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. We are evaluating the impact, if any, of the adoption of ASU 2013-11 on our consolidated balance sheets.

We recorded $22.6 million in bad debt expense during the three-month and nine-month periods ended September 30, 2013, to reserve the outstanding accounts receivable balance for two of our customers. See Note 6.


	March 31,		December 31,
	2014		2013
	(In thousands)
Rig spare parts and supplies	$	54,265	$	52,439
Deferred mobilization costs		30,199		20,274
Prepaid insurance		5,884		12,503
Deferred tax assets		10,222		10,221
Prepaid taxes		34,202		42,058
FOREX contracts		4,628		1,562
Other		7,110		4,940

Total	$	146,510	$	143,997


	September 30,		December 31,		March 31,		December 31,
	2013		2012		2014		2013
	(In thousands)				(In thousands)
Rig operating expenses	$	87,069	$	70,078	$	74,879	$	87,307
Payroll and benefits		107,210		88,612		125,252		121,387
Deferred revenue		34,457		71,699		31,043		26,975
Accrued capital project/upgrade costs		74,308		56,595		85,266		86,274
Interest payable		29,422		21,219		47,748		28,324
Personal injury and other claims		10,065		10,312		8,411		9,687
FOREX contracts		4,304		29		6		1,143
Other		7,397		5,890		10,516		9,574

Total	$	354,232	$	324,434	$	383,121	$	370,671

Noncash investing activities excluded from the Consolidated Statements of Cash Flows and other supplemental cash flow information is as follows:


	Nine Months Ended September 30,				Three Months Ended March 31,
	2013		2012		2014			2013
	(In thousands)				(In thousands)
Accrued but unpaid capital expenditures at period end	$	74,308	$	48,620	$	85,266		$	72,193
Cash interest payments⁽²⁾⁽¹⁾		54,000		54,187		12,531			12,531
Cash income taxes paid, net of refunds:
U.S. federal		47,000		53,000		—			20,000
Foreign		62,951		56,070		24,416			17,700
State		190		212		(31	)		—

In March 2014, our Board of Directors adopted our Equity Incentive Compensation Plan, or Equity Plan, which amends and restates our Second Amended and Restated 2000 Stock Option Plan, or Stock Plan, and directed that the Equity Plan be submitted to our stockholders for approval at the 2014 annual stockholders meeting to be held on May 20, 2014. The Equity Plan is expected to be approved.

In March 2014, we awarded 52,581 in targeted performance RSUs, with a volume weighted average price of our common stock preceding the grant date of $47.52 per share, to our Chief Executive Officer, or CEO, in connection with his commencement of service with us on March 3, 2014, subject to stockholder approval of the Equity Plan. RSUs are contractual rights to receive shares of our common stock in the future if the applicable vesting conditions are met. Targeted RSUs will become earned RSUs upon achievement of certain performance goals as set forth in the award certificate. Earned RSUs granted to our CEO will vest in one-third increments annually, over three years, commencing on the first anniversary of his hire date, with the first year being prorated for the portion of 2014 during which he was employed.

Because the stock-based compensation awarded to our CEO is a fixed monetary amount at the date of grant (the target value of $3.0 million on a prorated basis) with variances based on actual achievement of a performance goal, the award is being recorded as a share-based liability. Compensation cost will be recognized over the requisite service period as specified in the award. In connection with the targeted RSUs granted in March 2014, we recognized $66,000 in compensation expense. As of March 31, 2014, the targeted performance goal, as set forth in the award certificate, had not been met, but its achievement was deemed probable.

A reconciliation of the numerators and the denominators of our basic and diluted per-share computations follows:


	Three Months Ended March 31,
	2014		2013
	(In thousands, except per share data)
Net income – basic and diluted numerator	$	145,810	$	175,989

Weighted average shares – basic (denominator):		138,469		139,032
Effect of dilutive potential shares
Stock options and stock appreciation rights		4		49

Weighted average shares including conversions – diluted (denominator)		138,473		139,081

Earnings per share:
Basic	$	1.05	$	1.27

Diluted	$	1.05	$	1.27

The following table sets forth the share effects of stock options and the number of stock appreciation rights excluded from our computations of diluted earnings per share, or EPS, as the inclusion of such potentially dilutive shares would have been antidilutive for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013
	(In thousands)								(In thousands)
Employee and director:
Stock options		18		18		18		18		49		10
Stock appreciation rights		982		874		885		900		1,461		805

We report our investments as current assets in our Consolidated Balance Sheets in “Marketable securities,” representing the investment of cash available for current operations. See Note 6.7.

Our investments in marketable securities are classified as available for sale and are summarized as follows:


	September 30, 2013							March 31, 2014
	Amortized Cost		Unrealized Gain (Loss)			Market Value		Amortized Cost		Unrealized Gain (Loss)			Market Value
	(In thousands)							(In thousands)
U.S. Treasury Bills and Notes (due within one year)	$	799,981	$	(1	)	$	799,980	$	1,174,937	$	24		$	1,174,961
Mortgage-backed securities		212		12			224		167		7			174

Total	$	800,193	$	11		$	800,204	$	1,175,104	$	31		$	1,175,135


	December 31, 2012							December 31, 2013
	Amortized Cost		Unrealized Gain (Loss)			Market Value		Amortized Cost		Unrealized Gain (Loss)			Market Value
	(In thousands)							(In thousands)
U.S. Treasury Bills and Notes (due within one year)	$	1,149,707	$	150		$	1,149,857	$	1,749,879	$	(22	)	$	1,749,857
Mortgage-backed securities		276		25			301		188		8			196

Total	$	1,149,983	$	175		$	1,150,158	$	1,750,067	$	(14	)	$	1,750,053

Proceeds from maturities and sales of marketable securities and gross realized gains and losses are summarized as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2013			2012			2013			2012			2014		2013
	(In thousands)												(In thousands)
Proceeds from maturities	$	1,475,000		$	675,000		$	3,225,000		$	1,925,000		$	2,175,000	$	725,000
Proceeds from sales		25			56			62			150,106			21		14
Gross realized gains		—			—			—			—			—		—
Gross realized losses		(1	)		(1	)		(1	)		(6	)		—		—

Our international operations expose us to foreign exchange risk associated with our costs payable in foreign currencies for employee compensation, foreign income tax payments and purchases from foreign suppliers. We may utilize FOREX contracts to manage our foreign exchange risk. Our FOREX contracts generally require us to net settle the spread between the contracted foreign currency exchange rate and the spot rate on the contract settlement date, which, for most of our contracts, is the average spot rate for the contract period.

We enter into FOREX contracts when we believe market conditions are favorable to purchase contracts for future settlement with the expectation that such contracts, when settled, will reduce our exposure to foreign currency

gains and losses on future foreign currency expenditures. The amount and duration of such contracts are based on our monthly forecast of expenditures in the significant currencies in which we do business and for which there is a financial market (i.e., Australian dollars, Brazilian reais, British pounds sterling, Mexican pesos and Norwegian kroner). These forward contracts are derivatives as defined by GAAP.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ we settled FOREX contracts with aggregate notional values of approximately ~~$233.9~~$64.6 million and ~~$236.3~~$77.1 million, respectively, of which the entire aggregate amounts were designated as a cash flow accounting hedge. During the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ we did not enter into or settle any FOREX contracts that were not designated as accounting hedges.

The following table presents the aggregate amount of ~~loss~~gain recognized in our Consolidated Statements of Operations related to our FOREX contracts designated as accounting hedges for the three-month ~~and nine-month~~ periods ended ~~September 30, 2013~~March 31, 2014 and ~~2012.~~2013.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
Location of Loss Recognized in Income	2013			2012			2013			2012
	(In thousands)
Location of Gain Recognized in Income													2014		2013
Contract drilling expense	$	(5,018	)	$	(2,715	)	$	(2,246	)	$	(5,692	)	$	511	$	2,435

As of ~~September 30, 2013,~~March 31, 2014, we had FOREX contracts outstanding in the aggregate notional amount of ~~$151.6~~$146.1 million, consisting of ~~$20.7~~$11.6 million in Australian dollars, ~~$86.7~~$71.5 million in Brazilian reais, ~~$20.5~~$32.3 million in British pounds sterling, ~~$11.7~~$24.3 million in Mexican pesos and ~~$12.0~~$6.4 million in Norwegian kroner. These contracts generally settle monthly through ~~June~~December 2014. As of ~~September 30, 2013,~~March 31, 2014, all outstanding derivative contracts had been designated as cash flow hedges. See Note 6.7.

We have International Swap Dealers Association, or ISDA, contracts, which are standardized master legal arrangements that establish key terms and conditions, which govern certain derivative transactions. At ~~September 30, 2013,~~March 31, 2014, all of our FOREX contracts were with two counterparties and were governed under such ISDA contracts. There are no requirements to post collateral under these contracts; however, they do contain credit-risk related contingent provisions including credit support provisions and the net settlement of amounts owed in the event of early terminations. Additionally, should our credit rating fall below a specified rating immediately following the merger of ~~the company~~Diamond Offshore with another entity, the counterparty may require all outstanding derivatives under the ISDA contract to be settled immediately at current market value. Our ISDA arrangements also include master netting agreements to further manage counterparty credit risk associated with our FOREX contracts. We have elected not to offset the fair value amounts recorded for our FOREX contracts under these agreements in our Consolidated Balance Sheets as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012;~~2013; however, there would have been no significant difference in our Consolidated Balance Sheets if the estimated fair values were presented on a net basis for these periods.

The following table presents the fair values of our derivative FOREX contracts designated as hedging instruments at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012.~~2013.


	Fair Value				Balance Sheet Location		Fair Value
Balance Sheet Location	September 30, 2013		December 31, 2012			September 30, 2013				December 31, 2012			Fair Value							Balance Sheet Location		Fair Value
	(In thousands)						(In thousands)							March 31, 2014			December 31, 2013						March 31, 2014				December 31, 2013
														(In thousands)									(In thousands)
Prepaid expenses and other current assets	$	3,272	$	3,627	Balance Sheet Location	Accrued liabilities		$	(4,304	)	$	(29	)		$	4,628		$	1,562		Accrued liabilities			$	(6	)		$	(1,143	)

The following table presents the amounts recognized in our Consolidated Balance Sheets and Consolidated Statements of Operations related to our ~~FOREX contracts~~derivative financial instruments designated as cash flow hedges for the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012.~~


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
*FOREX Contracts:*
Amount of gain (loss) recognized in AOCGL on derivative (effective portion)	$	2,486		$	1,720		$	(7,539	)	$	6,191		$	4,368		$	435
Location of loss reclassified from AOCGL into income (effective portion)		Contract drilling expense			Contract drilling expense			Contract drilling expense			Contract drilling expense
Amount of loss reclassified from AOCGL into income (effective portion)	$	(5,572	)	$	(2,873	)	$	(2,951	)	$	(5,300	)
Location of gain (loss) reclassified from AOCGL into income (effective portion)														Contract drilling expense			Contract drilling expense
Amount of gain (loss) reclassified from AOCGL into income (effective portion)													$	269		$	2,232
Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)		Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)
Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	59		$	—		$	(59	)	$	(39	)	$	(1	)	$	(2	)
*Treasury lock agreements:*
Amount of gain recognized in AOCGL on derivative (effective portion)														—			—
Location of gain reclassified from AOCGL into income (effective portion)														Interest Expense			—
Amount of gain reclassified from AOCGL into income (effective portion)													$	2		$	—

As of ~~September 30, 2013,~~March 31, 2014, the estimated amount of net unrealized ~~losses~~gains associated with our FOREX contracts and treasury lock agreements that will be reclassified to earnings during the next twelve months was ~~$1.0 million.~~$4.6 million and $8,052, respectively. The net unrealized ~~losses~~gains associated with these derivative financial instruments will be reclassified to contract drilling ~~expense.~~expense and interest expense, respectively. During the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ we did not reclassify any amounts from AOCGL due to the probability of an underlying forecasted transaction not occurring.

Financial instruments which potentially subject us to significant concentrations of credit or market risk consist primarily of periodic temporary investments of excess cash, trade accounts receivable and investments in debt securities, including residential mortgage-backed securities. We generally place our excess cash investments in U.S. government-backed short-term money market instruments through several financial institutions. At times, such investments may be in excess of the insurable limit. We periodically evaluate the relative credit standing of these financial institutions as part of our investment strategy.

Most of our investments in debt securities are U.S. government securities with minimal credit risk. However, we are exposed to market risk due to price volatility associated with interest rate fluctuations.

Concentrations of credit risk with respect to our trade accounts receivable are limited primarily due to the entities comprising our customer base. Since the market for our services is the offshore oil and gas industry, this customer base consists primarily of major and independent oil and gas companies and government-owned oil companies. At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our largest customer in Brazil, Petróleo Brasileiro S.A. (a Brazilian multinational energy company that is majority-owned by the Brazilian government), accounted for ~~$120.4~~$109.7 million and ~~$116.4~~$154.5 million, or 28% and ~~24%~~35%, respectively, of our total consolidated ~~gross~~net trade accounts receivable balance. Our second largest customer in Brazil, OGX Petróleo e Gás Ltda. (a privately owned Brazilian oil and natural gas company), or OGX, accounted for $80.3 million or 17% of our total consolidated gross accounts receivable balance at December 31, 2012. Our accounts receivable balance from OGX was fully reserved at September 30, 2013.

In general, before working for a customer with whom we have not had a prior business relationship and/or whose financial stability may be uncertain to us, we perform a credit review on that company. Based on that analysis, we may require that the customer present a letter of credit, prepay or provide other credit enhancements. We record a provision for bad debts on a case-by-case basis when facts and circumstances indicate that a customer receivable may not be collectible and, historically, losses on our trade receivables have been infrequent occurrences.

During the third quarter of 2013, based on our assessment of the financial condition of two customers, OGX and Niko Resources Ltd., and our expectations regarding the probability of collection of amounts due to us, we recorded $22.6 million in bad debt expense, to reserve the outstanding receivable balances from these customers. All

outstanding receivables from these two customers have been fully reserved at September 30, 2013. Our allowance for bad debts was $28.2 million and $5.5 million at September 30, 2013 and December 31, 2012, respectively. We have not recognized any revenue associated with these two customers in the third quarter of 2013. See Note 2.

At December 31, 2012, $17.2 million in trade accounts receivable was payable to us from a 27% net profits interest, or NPI, in certain developmental oil-and-gas producing properties, which we believe is a real property interest. Our drilling program related to the NPI arrangement was completed in 2011, and the balance of the trade receivable due to us under the NPI arrangement was received in 2013. However, the customer who conveyed the NPI to us filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on August 17, 2012. Certain parties (including the debtor) in the bankruptcy proceedings have questioned whether our NPI, and certain amounts we have received under it since the filing of the bankruptcy, should be included in the debtor’s estate under the bankruptcy proceeding. We have filed a declaratory judgment action in the bankruptcy court seeking a declaration that our NPI, and payments that we have received from it since the filing of the bankruptcy, are not part of the bankruptcy estate, and we will vigorously defend our rights and pursue our interests in this matter.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Market conditions could cause an instrument to be reclassified among Levels 1, 2 and 3. Our policy regarding fair value measurements of financial instruments transferred into and out of levels is to reflect the transfers as having occurred at the beginning of the reporting period. There were no transfers between fair value levels during the ~~nine-month~~three-month periods ended ~~September 30, 2013~~March 31, 2014 and ~~2012.~~2013.

Certain of our assets and liabilities are required to be measured at fair value on a recurring basis in accordance with GAAP. In addition, certain assets and liabilities may be recorded at fair value on a nonrecurring basis. Generally, we record assets at fair value on a nonrecurring basis as a result of impairment charges. We did not

record any impairment charges related to assets measured at fair value on a nonrecurring basis during the three-month ~~and nine-month~~ periods ended ~~September 30, 2013~~March 31, 2014 and ~~2012.~~2013.


	December 31, 2012										March 31, 2014
	Fair Value Measurements Using							Assets at Fair Value			Fair Value Measurements Using							Assets at Fair Value
	Level 1		Level 2			Level 3		Assets at Fair Value			Level 1		Level 2			Level 3		Assets at Fair Value
	(In thousands)										(In thousands)
Recurring fair value measurements:
Assets:
Short-term investments	$	1,434,751	$	—		$	—	$	1,434,751		$	1,581,954	$	—		$	—	$	1,581,954
FOREX contracts		—		3,627			—		3,627			—		4,628			—		4,628
Mortgage-backed securities		—		301			—		301			—		174			—		174

Total assets	$	1,434,751	$	3,928		$	—	$	1,438,679		$	1,581,954	$	4,802		$	—	$	1,586,756

Liabilities:
FOREX contracts	$	—	$	(29	)	$	—	$	(29	)	$	—	$	(6	)	$	—	$	(6	)

Nonrecurring fair value measurements:

											December 31, 2013
											Fair Value Measurements Using							Assets at Fair Value
											Level 1		Level 2			Level 3		Assets at Fair Value
											(In thousands)
Recurring fair value measurements:
Assets:
Assets held for sale	$	—	$	—		$	3,900	$	3,900
Short-term investments											$	2,061,154	$	—		$	—	$	2,061,154
FOREX contracts												—		1,562			—		1,562
Mortgage-backed securities												—		197			—		197

Total assets											$	2,061,154	$	1,759		$	—	$	2,062,913

Liabilities:
FOREX contracts											$	—	$	(1,143	)	$	—	$	(1,143	)

We believe that the carrying amounts of our other financial assets and liabilities (excluding long-term debt), which are not measured at fair value in our Consolidated Balance Sheets, approximate fair value based on the following assumptions:

We consider our ~~long-term debt,~~senior notes, including current maturities, to be Level 2 liabilities under the GAAP fair value hierarchy and, accordingly, the fair value of our ~~5.70% Senior Notes due 2039, 5.875% Senior Notes due 2019, 4.875% Senior Notes due July 1, 2015, and 5.15% Senior Notes due September 1, 2014~~senior notes was derived using a third-party pricing service at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012.~~2013. We perform control procedures over information we obtain from pricing services and brokers to test whether prices received represent a reasonable estimate of fair value. These procedures include the review of pricing service or broker pricing methodologies and comparing fair value estimates to actual trade activity executed in the market for these instruments occurring ~~around~~generally within a 10-day period of the report date. Fair values and related carrying values of our ~~long-term debt instruments~~senior notes are shown below.

We have estimated the fair value amounts by using appropriate valuation methodologies and information available to management. Considerable judgment is required in developing these estimates, and accordingly, no assurance can be given that the estimated values are indicative of the amounts that would be realized in a free market exchange.

Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows:


	September 30,			December 31,			March 31,			December 31,
	2013			2012			2014			2013
	(In thousands)						(In thousands)
Drilling rigs and equipment	$	7,295,964		$	7,107,279		$	8,515,784		$	7,412,066
Construction work-in-progress		1,553,430			990,964			1,156,923			1,668,211
Land and buildings		65,362			64,296			65,798			65,627
Office equipment and other		64,891			60,239			67,318			65,799

Cost		8,979,647			8,222,778			9,805,823			9,211,703
Less: accumulated depreciation		(3,648,177	)		(3,357,806	)		(3,851,327	)		(3,744,476	)

Drilling and other property and equipment, net	$	5,331,470		$	4,864,972		$	5,954,496		$	5,467,227

Construction work-in-progress, including capitalized interest, at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013 is summarized as follows:


	September 30,		December 31,		March 31,		December 31,
	2013		2012		2014		2013
	(In thousands)				(In thousands)
Ultra-deepwater drillships	$	834,476	$	741,059	$	655,277	$	868,908
Ultra-deepwater semisubmersible:
Ocean GreatWhite		192,311		—		199,294		195,578
Deepwater semisubmersibles:
Ocean Onyx		299,886		167,403		—		339,129
Ocean Apex		226,757		82,502		302,352		264,596

Total construction work-in-progress	$	1,553,430	$	990,964	$	1,156,923	$	1,668,211

8.In January and February of 2014, the deepwater semisubmersibleOcean Onyx and the ultra-deepwater drillshipOcean BlackHawk, respectively, were placed in service and are no longer reported as construction work-in-progress at March 31, 2014.

We have a syndicated 5-Year Revolving Credit Agreement, or Credit Agreement, with Wells Fargo Bank, National Association, as administrative agent and swingline lender. Effective March 17, 2014, we entered into a commitment increase agreement and second amendment to the Credit Agreement, which, among other things, provided for a $250.0 million increase in the aggregate commitment under the revolving credit facility and an approximately six-month extension of the maturity date with all of the existing lenders. The Credit Agreement provides for a $1.0 billion senior unsecured revolving credit facility for general corporate purposes, maturing on March 17, 2019. The entire amount of the facility is available for revolving loans. Up to $250 million of the facility is available for the issuance of performance or other standby letters of credit and up to $100 million is available for swingline loans.

Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries. With respect to each claim or exposure, we have made an assessment, in accordance with GAAP, of the probability that the resolution of the matter would ultimately result in a loss. When we determine that an unfavorable resolution of a matter is probable and such amount of loss can be determined, we record a liability for the amount of the estimated loss at the time that both of these criteria are met. Our management believes that we have recorded adequate accruals for any liabilities that may reasonably be expected to result from these claims.

~~Litigation.~~Litigation. We are one of several unrelated defendants in lawsuits filed in state courts alleging that defendants manufactured, distributed or utilized drilling mud containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our offshore drilling rigs. The plaintiffs seek, among other things, an award of unspecified compensatory and punitive damages. The manufacture and use of asbestos-containing drilling mud had already ceased before we acquired any of the drilling rigs addressed in these lawsuits. We believe that we are not liable for the damages asserted and we expect to receive complete defense and indemnity with respect to ~~a majority~~many of the lawsuits from Murphy Exploration & Production Company pursuant to the terms of our 1992 asset purchase agreement with them. We also believe that we are not liable for the damages asserted in the remaining lawsuits pursuant to the terms of our 1989 asset purchase agreement with Diamond M Corporation, and we filed a declaratory judgment action in Texas state court against NuStar Energy LP, or NuStar, the successor to Diamond M Corporation, seeking a judicial determination that we did not assume liability for these claims. We obtained summary judgment on our claims in the declaratory judgment action, but NuStar appealed the trial court’s decision, and the appellate court has remanded the case to trial. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but do not believe that ultimate liability, if any, resulting from this litigation will have a material effect on our consolidated financial condition, results of operations and cash flows.

Various other claims have been filed against us in the ordinary course of business. In the opinion of our management, no pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on our consolidated financial position, results of operations and cash flows.

We intend to defend these matters vigorously; however, we cannot predict with certainty the outcome or effect of any litigation matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits.

NPI Arrangement.We received payments measured by a percentage net profits interest (of primarily 27%) under an overriding royalty interest in certain developmental oil-and-gas producing properties, or NPI, which we believe is a real property interest. Our drilling program related to the NPI was completed in 2011, and the balance of the amounts due to us under the NPI was received in 2013. However, the customer who conveyed the NPI to us filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in August 2012. Certain parties (including the debtor) in the bankruptcy proceedings have questioned whether our NPI, and certain amounts we received under it since the filing of the bankruptcy, should be included in the debtor’s estate under the bankruptcy proceeding. We filed a declaratory judgment action in the bankruptcy court seeking a declaration that our NPI, and payments that we received from it since the filing of the bankruptcy, are not part of the bankruptcy estate. We expect that once discovery is concluded in the bankruptcy court, the federal district court will hold a trial to determine the nature of our NPI. We will vigorously defend our rights and pursue our interests in this matter.

Personal Injury ~~Claims.~~Claims~~Our~~. Under our current insurance policies that expire on May 1, 2014, our deductibles for marine liability insurance coverage, including personal injury claims, which primarily result from Jones Act liability in the Gulf of Mexico, are ~~currently~~ $10.0 million for the first occurrence, with no aggregate deductible, and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims ~~which~~that might arise during the policy year. We intend to increase our deductible for marine liability insurance coverage to $25.0 million for the first occurrence, with no aggregate deductible, effective with our policy renewals on May 1, 2014.

The Jones Act is a federal law that permits seamen to seek compensation for certain injuries during the course of their employment on a vessel and governs the liability of vessel operators and marine employers for the work-related injury or death of an employee. We engage outside consultants to assist us in estimating our aggregate liability for personal injury claims based on our historical losses and utilizing various actuarial models. We allocate

a portion of the aggregate liability to “Accrued liabilities” based on an estimate of claims expected to be paid within the next twelve months with the residual recorded as “Other liabilities.” At ~~September 30, 2013,~~March 31, 2014, our estimated liability for personal injury claims was ~~$35.5~~$35.4 million, of which ~~$8.1~~$8.2 million and ~~$27.4~~$27.2 million were recorded in “Accrued liabilities” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. At December 31, ~~2012,~~2013, our estimated liability for personal injury claims was ~~$36.1~~$35.5 million, of which ~~$9.9~~$9.5 million and ~~$26.2~~$26.0 million were recorded in “Accrued liabilities” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. The eventual settlement or adjudication of these claims could differ materially from our estimated amounts due to uncertainties such as:

Ultra-Deepwater Floater Construction. ~~In May 2013, we entered into an agreement with Hyundai Heavy Industries, Co.~~TheOcean GreatWhite, ~~Ltd., or Hyundai, for the construction of~~ a 10,000 foot dynamically positioned, harsh environment semisubmersible drilling ~~rig. The~~~~Ocean GreatWhite~~rig, is under construction in South Korea at an estimated cost of $755 million, including shipyard costs, capital spares, commissioning and shipyard supervision. The contracted price to Hyundai Heavy Industries Co., Ltd., or Hyundai, totaling $628.5 million is payable in two installments, of which the first installment of $188.6 million has been paid. The final installment of $439.9 million is due upon delivery of the rig, which is expected to occur in the first quarter of 2016.

Drillship Construction. ~~We are financially obligated~~At March 31, 2014, we had three ultra-deepwater drillships under ~~four separate turnkey~~ construction ~~contracts with~~at Hyundai ~~for the construction of four ultra-deepwater drillships. We expect the~~in South Korea at an estimated aggregate cost of ~~the construction of our drillships,~~$1.9 billion, including shipyard costs, commissioning, capital spares and project management ~~costs, to be approximately $2.6~~

~~billion.~~costs. The contracted price of each drillship is payable to Hyundai in two installments, with final payment due on delivery of each drillship. We have paid the first installment for each of ~~the four~~our drillships currently under construction, aggregating ~~$647.6~~$493.2 million. TheOcean ~~BlackHawk~~ ~~and~~ ~~Ocean~~ BlackHornet, are expected to be delivered in the fourth quarter of 2013 and in the first quarter of 2014, respectively, and, at those times, the second installment of approximately $394 million will be payable to Hyundai for each rig. TheOcean BlackRhino andOcean BlackLion are expected to be delivered in the second ~~and fourth quarters~~quarter of 2014, third quarter of 2014 and first quarter of 2015, respectively, at which times approximately ~~$395~~$390 million will be payable to Hyundai for each rig.

~~Ocean Onyx~~~~Construction. We are obligated under a vessel modification agreement with Keppel AmFELS, L.L.C., or Keppel, for the construction of the~~~~Ocean Onyx,~~~~a moored semisubmersible deepwater rig, which is expected to be delivered in the fourth quarter of 2013. We estimate the aggregate cost for the construction of the~~~~Ocean Onyx~~ to be approximately $335.0 million, including commissioning, capital spares and project management costs. The contracted price due to Keppel is payable in 11 installments based on the occurrence of certain events as detailed in the vessel modification agreement. To date, we have paid the first nine installments, of which $58.4 million and $65.7 million was paid in 2013 and 2012, respectively. The balance payable to Keppel under the construction agreement of $21.9 million is payable in the fourth quarter of 2013.

Ocean Apex Construction. We are obligated under a vessel modification agreement with Jurong Shipyard Pte Ltd, or Jurong, for the construction of theOcean Apex, a moored semisubmersible deepwater rig, which is expected to be delivered in the third quarter of 2014 at an aggregate cost of approximately $370.0 million, including shipyard costs, commissioning, capital spares and project management costs. The contracted price due to Jurong is payable in 12 installments based on the occurrence of certain events as detailed in the vessel modification agreement. We have paid the first ~~five~~eight installments, ~~of which $33.8~~aggregating $87.8 million ~~and $27.0 million was~~that has been paid ~~in 2013 and 2012, respectively.~~to date. The remaining ~~$74.3~~$47.3 million in aggregate milestone payments are payable to Jurong during ~~the remainder of 2013 and in~~ 2014 as construction milestones are met.

Ocean Patriot Enhancements. ~~In February 2013, we entered into a vessel modification agreement with Keppel FELS Limited, or Keppel Singapore, for enhancements~~The rig’s North Sea enhancement project is ongoing and is expected to ~~the~~~~Ocean Patriot~~ ~~that will enable the rig to work~~be completed in the ~~North Sea. We estimate the~~second quarter of 2014 at an estimated cost of ~~the enhancement project to be~~ approximately $120.0 million, including shipyard costs, owner-furnished equipment and labor, commissioning and capital spares. ~~Construction work is expected~~We are financially obligated to ~~begin in Singapore in the fourth quarter of 2013 and to be completed in the second quarter of 2014. The contracted price due~~Keppel FELS Limited, or Keppel Singapore, ~~is approximately~~for $29.0 million of the total project cost, payable in seven installments based on the occurrence of certain events as detailed in the vessel modification agreement. We have paid the first ~~two~~four installments due to Keppel Singapore, aggregating ~~$10.1 million in 2013.~~$18.8 million. The remaining ~~$18.8~~$10.2 million in aggregate milestone payments ~~are~~is payable ~~to Keppel Singapore~~ during the remainder of ~~2013 and in~~ 2014 as construction milestones are met.

At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, we had no other purchase obligations for major rig upgrades or any other significant obligations, except for those related to our direct rig operations, which arise during the normal course of business.

Letters of Credit and Other.We were contingently liable as of ~~September 30, 2013~~March 31, 2014 in the amount of ~~$70.2~~$65.1 million under certain performance, ~~bid,~~ supersedeas and ~~custom~~customs bonds and letters of credit. Agreements relating to approximately ~~$58.2~~$60.5 million of performance, supersedeas and customs bonds can require collateral at any time. As of ~~September 30, 2013,~~March 31, 2014, we had not been required to make any collateral deposits with respect to these agreements. The remaining agreements cannot require collateral except in events of default. On our behalf, banks have issued letters of credit securing certain of these bonds.


	Unrealized Gain (Loss) on
	Derivative Financial Instruments			Marketable Securities			Total AOCGL
	(In thousands)
Balance at January 1, 2014	$	357		$	(7	)	$	350
Change in other comprehensive gain (loss) before reclassifications, after tax of $(1,529) and $(16)		2,839			38			2,877
Reclassification adjustments for items included in Net Income, after tax of $94 and $1		(177	)		(8	)		(185	)

Balance at March 31, 2014	$	3,019		$	23		$	3,042

The following table presents the line items in our Consolidated Statements of Operations affected by reclassification adjustments out of AOCGL.


Major Category of AOCGL	Three Months Ended			Nine Months Ended			Consolidated Statements of Operations Line Items		Three Months Ended March 31,						Consolidated Statements of Operations Line Items
	September 30, 2013
	(In thousands)
Major Category of AOCGL									2014			2013
Major Category of AOCGL								(In thousands)
Derivative Financial Instruments:
Unrealized (gain) loss on FOREX contracts	$	5,572		$	2,951		Contract drilling, excluding depreciation		$	(269	)	$	(2,232	)	Contract drilling, excluding depreciation
Unrealized (gain) on Treasury Lock Agreements										(2	)		—		Interest expense
		(1,950	)		(1,033	)	Income tax expense			94			781		Income tax expense

	$	3,622		$	1,918		Net of tax		$	(177	)	$	(1,451	)	Net of tax

Marketable Securities:
Unrealized (gain) loss on marketable securities	$	(15	)	$	(165	)	Other, net		$	(9	)	$	(97	)	Other, net
		1			19		Income tax expense			1			14		Income tax expense

	$	(14	)	$	(146	)	Net of tax		$	(8	)	$	(83	)	Net of tax

Although we provide contract drilling services with different types of offshore drilling rigs and also provide such services in many geographic locations, we have aggregated these operations into one reportable segment based on the similarity of economic characteristics due to the nature of the revenue ~~earnings~~earning process as it relates to the offshore drilling industry over the operating lives of our drilling rigs.


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2013		2012		2013		2012		2014		2013
	(In thousands)								(In thousands)
Floaters:
Ultra-Deepwater	$	195,215	$	195,574	$	617,673	$	673,233	$	205,794	$	191,357
Deepwater		147,333		163,816		495,858		452,384		146,559		164,420
Mid-Water		297,368		319,491		891,449		948,548		285,979		305,221

Total Floaters		639,916		678,881		2,004,980		2,074,165		638,332		660,998
Jack-ups		50,825		35,146		130,632		121,278		46,976		38,975

Total contract drilling revenues		690,741		714,027		2,135,612		2,195,443		685,308		699,973
Revenues related to reimbursable expenses		15,424		15,114		58,312		40,528		24,116		29,768

Total revenues	$	706,165	$	729,141	$	2,193,924	$	2,235,971	$	709,424	$	729,741

Our drilling rigs are highly mobile and may be moved to other markets throughout the world in response to market conditions or customer needs. At ~~September 30, 2013,~~March 31, 2014, our actively-marketed drilling rigs were en route to or located offshore 1311 countries in addition to the United States. Revenues by geographic area are presented by attributing revenues to the individual country or areas where the services were performed.

   Three Months Ended    Nine Months Ended
   September 30,    September 30,
   2013    2012    2013    2012
   (In thousands)
United States
   $ 69,627       $ 49,443       $ 253,654       $ 146,009
International:

South America
   311,708       360,617       896,029       1,084,210
Europe/Africa/Mediterranean
   185,335       162,324       559,290       484,229
Australia/Asia
   88,054       111,850       333,728       379,240
Mexico
   51,441       44,907       151,223       142,283








Total revenues
   $ 706,165       $ 729,141       $ 2,193,924       $ 2,235,971

Our income tax expense is a function of the mix between our domestic and international pre-tax earnings or losses, as well as the mix of international tax jurisdictions in which we operate. Certain of our international rigs are owned and operated, directly or indirectly, by one of our wholly owned foreign subsidiaries. It is our intention to indefinitely reinvest future earnings of this subsidiary to finance foreign activities. Accordingly, we have not made a provision for U.S. income taxes on such earnings except to the extent that such earnings were immediately subject to U.S. income taxes.

During 2013 we were under audit by the Egyptian tax authorities for the tax years 2006 through 2010. In December 2013, after receiving notification that the Egyptian government had concluded the income tax audit for the period 2006 to 2008 and proposed a $1.2 billion increase to taxable income, we accrued an additional $56.9 million of expense for uncertain tax positions in Egypt for all open years. During the first quarter of 2013, our tax expense was reduced by $27.5 million as a result of the American Taxpayer Relief Act of 2012, or the Act, which was signed into law on January 2, 2013. The Act extends through 2013 several expired temporary business provisions, commonly referred to as “extenders,” which were retroactively extended to the beginning of 2012. As required by GAAP,2014, we ~~recorded the retroactive effect of the extenders when the Act was signed into law.~~

~~Tax Returns and Examinations.~~We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and various foreign jurisdictions. Tax years that remain subject to examination by these jurisdictions include years 2003 to 2012. We are currently under audit in several of these jurisdictions. We do not anticipate that any adjustments resulting from the tax audit of any of these years will have a material impact on our consolidated results of operations, financial condition and cash flows.

~~Mexico Tax Jurisdiction. The tax authorities in Mexico previously audited our income tax returns~~settled certain disputes for the years ~~2004 and~~ 2006 ~~and had issued assessments for tax years 2004 and 2006 of approximately $22.9 million and $24.4 million, respectively, including interest and penalties, which we had appealed. In 2013~~through 2008 with the ~~Mexican~~Egyptian tax authorities, ~~initiated~~which resulted in an aggregate $17.2 million reduction in tax expense, comprised of a tax amnesty program whereby income tax assessments, including penalties and interest, could be partially or completely waived. Under the tax amnesty we were able to settle our tax liabilities for the years 2004 and 2006 for a net cash cost$23.2 million reversal of ~~$3.7 million. As a result of increases in~~ uncertain tax positions, ~~for later years, we recorded an additional $13.2~~partially offset by $6.0 million ~~of expense, including $5.0 million of interest and $2.7 million of penalties.~~

~~Due to the expiration of the statute of limitations~~ in Mexico for the 2007 tax year at the end of June 2013, during the second quarter of 2013, we reversed our $4.3 million accrual for this uncertain tax position, of which $1.5 million was interest and $0.6 million was penalty.

~~On June 13, 2013 we received official notification that the Mexican tax authorities will be auditing the 2008~~current income tax ~~return of one of our Mexican subsidiaries.~~expense.

~~U.S. Tax Jurisdiction. In May 2013, we were notified by the Department of the Treasury that the Internal Revenue Service audit of our 2010 corporate tax return was completed without adjustment.~~

Brazil Tax Jurisdiction. In March 2013, the Brazilian tax authorities began an audit of our income tax returns for the years 2009 and 2010. We are continuing to defend tax assessments by the Brazilian tax authorities for the years 2000, 2004, 2005 and 2007.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, ~~2012.~~2013. References to “Diamond Offshore,” “we,” “us” or “our” mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.

We are a leader in offshore drilling, providing contract drilling services to the energy industry around the globe with a ~~total~~ fleet of 45 offshore drilling rigs, including ~~seven~~five rigs under construction. Our fleet consists of 33 semisubmersibles, ~~three~~two of which are under construction, ~~and an additional three of which are held for sale,~~ seven jack-ups, one of which is held for sale, and five dynamically positioned drillships, ~~four~~three of which are under construction.

~~Several~~ As of the date of this report, four of our ~~construction projects are nearing completion,~~drilling rigs were cold-stacked, including one jack-up rig held for sale and ~~we expect delivery of our first new drillship, the~~~~Ocean BlackHawk~~~~, and the~~three mid-water semisubmersible rigs.

The recently completed deepwater floaterOcean Onyx has been working under a one-year contract in the ~~final~~U.S. Gulf of Mexico, or GOM, since mid-January, and the ultra-deepwater drillshipOcean BlackHawk recently arrived in the GOM, having completed its maiden voyage from South Korea. We expect theOcean BlackHawk to commence operating under a five-year contract later in the second quarter of ~~2013.~~ 2014.

During 2014, we expect to take delivery of ~~our remaining three~~two additional ultra-deepwater drillships, theOcean BlackHornet~~, the~~ andOcean BlackRhino ~~and the~~~~Ocean BlackLion~~ ~~in the first, second and fourth quarters, respectively, and~~, as well as the deepwater floaterOcean Apex ~~in the third quarter of the year. Our most recently announced project, construction of~~. The remaining ultra-deepwater drillship, theOcean ~~GreatWhite~~BlackLion, ~~an ultra-deepwater~~and the harsh environment, ultra-deepwater semisubmersible ~~rig, is underway and is expected to be completed in the first quarter of 2016. The~~Ocean ~~Onyx~~,~~Ocean BlackHawk~~ ~~and~~~~Ocean BlackHornet~~GreatWhite are expected to be ~~operating under contracts~~delivered in ~~the GOM in the first, second~~2015 and ~~third quarters of 2014,~~2016, respectively. ~~The~~~~Ocean Apex~~~~has recently received a letter of intent, or LOI, for a two-well program, plus one-well option, in~~Of these rigs, the ~~Southeast Asia market beginning in the third quarter of 2014. The LOI is subject to customary conditions, including execution of a definitive agreement. The~~~~Ocean GreatWhite~~ ~~is contracted for future operations offshore the coast of southern Australia commencing in the second half of 2016. The~~Ocean BlackRhino andOcean BlackLion are not yet contracted.

TheOcean Confidencecommenced a service-life-extension project ~~for the~~~~Ocean Patriot~~in mid-April 2014, which is expected to ~~commence in the final quarter~~keep it out of ~~2013 in Singapore. Upon completion, the rig will then mobilize to the United Kingdom, or U.K., sector of the North Sea, for a contract commencing~~drilling service until early in the second quarter of ~~2014.~~2015.

Ultra-Deepwater ~~and Deepwater Floaters~~Floaters.. The ultra-deepwater ~~and deepwater floater markets are generally firm. Regionally, the Golden Triangle, defined by the offshore drilling industry as the offshore basins of West Africa, Brazil and the Gulf of Mexico,~~market continues to be an area of significant ultra-deepwater and deepwater activity. Demand currently remains strong for ultra-deepwater rigs offshore West Africa, primarily in Angola and Nigeria, where discoveries in the pre-salt formations have led to increased interest in the region. On the Outer Continental Shelf of the United States, or U.S., Gulf of Mexico, or GOM, drilling activity has surpassed pre-Macondo levels, and industry analysts predict that the market will remain strong in the near term, particularly in the ultra-deepwater market. Demand for ultra-deepwater and deepwater rigs offshore Brazil currently remains strong.

~~However, we believe that the offshore drilling industry will be challenged in the future by expected newbuild~~weaken. Newbuild rig deliveries ~~which are expected to increase competition~~ and ~~could result~~established rigs coming off contract have created an oversupply of floaters in ~~downward pressure on dayrates if demand does not remain balanced with expected supply. Since 2010, the outlook for~~both the ultra-deepwater and deepwater markets, and an increasing number of drilling units are competing for fewer available jobs due to cutbacks and/or delays in customer drilling programs. This oversupply has led to fierce competition, resulting in lower contracted dayrates, the execution of shorter-term contracts and, in some cases, the idling of rigs. There have been few bidding opportunities thus far in 2014, and the outlook for the remainder of the year and into 2015 is uncertain.

Deepwater Floaters. The market for deepwater floaters has trended downward in tandem with the ultra-deepwater market. Demand in this market is intermittent, with limited bidding opportunities. As a ~~significant number~~result, multiple existing units face pockets of ~~orders~~idle time in 2014, and newbuild rigs may also have challenges securing work. Dayrates have also declined, compared to prior peak markets, and are projected by industry analysts to continue to soften in 2014.

Mid-Water Floaters. Strength in the mid-water market varies significantly by region. In both the United Kingdom, or U.K., and Norway sectors of the North Sea, the mid-water market is showing some signs of weakening, in the form of declining dayrates, in part due to an increase in the availability of sublet opportunities being offered for some term-contracted units. In the GOM, demand for mid-water units is limited, while in Brazil, demand has moderated. Frontier markets across Southeast Asia and South America, including Colombia, Myanmar, Nicaragua, Peru and Trinidad and Tobago, are areas of future, possible market demand; however, opportunities in these areas are not expected to emerge quickly.

Impact of Newbuild Rigs and Other Challenges Facing the Offshore Drilling Industry

Despite the challenging short-term market outlook, based on industry reports, there have been nine additional newbuild floaters ~~by established drilling contractors as well as new entrants to~~ordered since the ~~industry.~~beginning of 2014. As of the date of this report, ~~the total number of announced~~based on industry data, there are approximately 69 competitive, or non-owner-operated, newbuild floaters ~~exceeds 100 rigs, including~~on order, and, in addition, an estimated 2829 rigs potentially to be built on behalf of Petróleo Brasileiro S.A. ~~Excluding these customer-ordered~~, which is currently our largest single customer based on annual consolidated revenues. Of the competitive rigs, 3831 of the 6251 newbuilds scheduled for delivery in 2014 through 2015, including two of our four rigs that we expect to be delivered in 2014 and 2015, as well as over half of the 11 newbuilds scheduled for delivery in 2016, are not yet contracted for future ~~work, including two~~work. The influx of ~~our four~~newbuilds into the market, combined with established rigs coming off contract in 2014 and 2015, is expected to ~~be delivered in 2014.~~continue to weaken the ultra-deepwater and deepwater floater markets.

In addition, ~~we believe that~~ the offshore drilling industry ~~will continue to be~~is challenged by growing regulatory demands and more complex customer specifications, which could disadvantage the marketability of some lower specification rigs. Customer focus on completing existing projects, possible reduction or deferral of new investment, reallocation of budgets away from offshore projects and particular customer requirements in certain markets could also displace, or reduce, demand and result in the migration of some ultra-deepwater rigs to work in deepwater and, likewise, some deepwater rigs to ~~displace~~compete against mid-water units.

~~Mid-Water Floaters~~~~. Strength~~ Various units across all segments could experience lower utilization or increased idle time, and lower specification rigs could be cold stacked or scrapped. The risk that floaters may be cold stacked is greatest in the mid-water floater market, ~~varies significantly by region, but overall remains balanced. In both the U.K. and Norway sectors of the North Sea, the mid-water market continues~~where it may become necessary to ~~be quite~~

strong. Increasing operator interest in frontier markets across Southeast Asia and South America, including Myanmar, Peru, Nicaragua, Trinidad and Tobago, and Colombia indicates possible future strengthening in those regions. In the GOM, demand for mid-water units is limited, while in Brazil, demand is moderating.

We are a small participant in the jack-up market and have a limited view of overall market conditions. We have four jack-up rigs working under long-term contracts in the Mexican waters of the Gulf of Mexico, where contract renewals indicate strong demand. Our sole marketed jack-up rig in the U.S. Gulf of Mexico works well-to-well for smaller operators under short-term commitments.cold stack certain older, lower specification drilling rigs.

See “– Contract Drilling Backlog”for future commitments of our rigs during ~~the remainder of 2013~~2014 through 2019.

The following table reflects our contract drilling backlog as of ~~October~~April 23, ~~2013,~~2014, February ~~1, 2013~~5, 2014 (the date reported in our Annual Report on Form 10-K for the year ended December 31, ~~2012)~~2013), and ~~October 17, 2012~~April 25, 2013 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2012)~~March 31, 2013). Contract drilling backlog as

presented below includes only firm commitments (typically represented by signed contracts) and 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 92-98% 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. Changes in our contract drilling backlog between periods are a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts.

Our contract drilling backlog, as of October 23, 2013, was $7.4 billion and no longer includes an aggregate approximately $531.0 million in previously reported contracted backlog, for the fourth quarter of 2013 through 2016, associated with certain contracts for four of our rigs due to uncertainty associated with realizing this backlog.

Contract drilling backlog for our mid-water and ultra-deepwater floaters no longer includes approximately $47.0 million and $434.0 million of previously reported backlog attributable to future work for the~~Ocean Lexingtonand the~~~~Ocean Monarch~~~~, respectively, for Niko Resources Ltd., or Niko. As of the date of this report, $0.7 million and $34.2 million owed to us at September 30, 2013 by Niko in respect of the~~~~Ocean Lexington~~ ~~and the~~~~Ocean Monarch~~~~, respectively, was past due and has been fully reserved. We have notified Niko that it is delinquent in its payment obligations under the contract for the~~~~Ocean Monarch~~~~. We are in discussions with Niko regarding payment and their obligations under the contracts for these rigs. The~~~~Ocean Lexington~~ is currently working in Trinidad for a consortium of companies, including Niko. Expected utilization of the rig by Niko over the term of this agreement has been excluded from contracted backlog as of October 23, 2013. The~~Ocean Monarch~~ is currently idle while we attempt to negotiate a repayment plan for amounts owed to us and determine Niko’s future commitment to the rig, which may include subletting to another customer or termination to allow newly contracted work for another customer. We do not believe that it is likely that the~~Ocean Monarchwould be back on dayrate before the second quarter of 2014 due to the amount of customer lead time typically required for rigs with these specifications.~~

~~Contract drilling backlog for our mid-water and deepwater floaters no longer includes approximately $22.0 million and $28.0 million in previously reported backlog for the~~~~Ocean Quest~~~~and the~~~~Ocean Star~~~~, respectively. As of the date of this report, $57.9 million owed to us at September 30, 2013 by OGX Petróleo e Gás Ltda., or OGX, was past due. The~~~~Ocean Quest~~ ~~contract has been terminated, and the rig has been released and is mobilizing to Singapore. The~~~~Ocean Star~~ ~~has been sublet to another customer for the remaining duration of the existing contract with OGX for this rig. See “—Results of Operations— Overview—~~~~Revenue Not Recognized and Bad Debt Expense.~~”


	October 23, 2013		February 1, 2013		October 17, 2012		April 23, 2014		February 5, 2014		April 25, 2013
	(In thousands)						(In thousands)
Contract Drilling Backlog
Floaters:
Ultra-Deepwater⁽¹⁾	$	4,306,000	$	4,422,000	$	4,660,000	$	3,910,000	$	4,111,000	$	4,257,000
Deepwater⁽²⁾		862,000		1,229,000		1,373,000		962,000		794,000		1,143,000
Mid-Water⁽³⁾		1,997,000		2,649,000		2,510,000		1,504,000		1,744,000		2,436,000

Total Floaters		7,165,000		8,300,000		8,543,000		6,376,000		6,649,000		7,836,000
Jack-ups		188,000		272,000		203,000		158,000		180,000		249,000

Total	$	7,353,000	$	8,572,000	$	8,746,000	$	6,534,000	$	6,829,000	$	8,085,000

The following table reflects the amount of our contract drilling backlog by year as of ~~October~~April 23, ~~2013.~~2014.


	For the Years Ending December 31,										For the Years Ending December 31,
	Total		2013⁽¹⁾		2014		2015		2016 - 2019		Total		2014⁽¹⁾		2015		2016		2017 - 2019
	(In thousands)										(In thousands)
Contract Drilling Backlog
Floaters:
Ultra-Deepwater⁽²⁾	$	4,306,000	$	223,000	$	942,000	$	1,208,000	$	1,933,000	$	3,910,000	$	739,000	$	1,192,000	$	518,000	$	1,461,000
Deepwater⁽³⁾		862,000		121,000		455,000		224,000		62,000		962,000		389,000		326,000		208,000		39,000
Mid-Water⁽⁴⁾		1,997,000		296,000		974,000		471,000		256,000		1,504,000		780,000		449,000		161,000		114,000

Total Floaters		7,165,000		640,000		2,371,000		1,903,000		2,251,000		6,376,000		1,908,000		1,967,000		887,000		1,614,000
Jack-ups		188,000		45,000		73,000		48,000		22,000		158,000		88,000		48,000		22,000		—

Total	$	7,353,000	$	685,000	$	2,444,000	$	1,951,000	$	2,273,000	$	6,534,000	$	1,996,000	$	2,015,000	$	909,000	$	1,614.000

⁽³⁾

Contract drilling backlog as of ~~October~~April 23, ~~2013~~2014 for our deepwater floaters includes (i) ~~$59.0 million, $115.0~~$95.0 million, $134.0 million and $62.0 million for the years ~~2013~~2014 to 2016, respectively, attributable to our contracted operations offshore Brazil and (ii) ~~$157.0~~$29.0 million and ~~$22.0~~$7.0 million for the years ~~2013~~2014 and ~~2014,~~2015, respectively, attributable to future work for theOcean ~~Onyx~~Apex, which is under construction.

⁽⁴⁾	Contract drilling backlog as of ~~October~~April 23, ~~2013~~2014 for our mid-water floaters includes ~~$98.0 million, $342.0~~$244.0 million and $79.0 million for the years ~~2013 to~~2014 and 2015, respectively, attributable to our contracted operations offshore Brazil.

The following table reflects the percentage of rig days committed by year as of ~~October~~April 23, ~~2013.~~2014. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet, to total available days (number of rigs multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning dates for theOcean ~~BlackHawk~~,~~Ocean Onyx~~,~~Ocean~~ BlackHornet, Ocean Apex,Ocean BlackRhino, Ocean BlackLion and ~~the~~Ocean GreatWhite, all of which are under construction.


	For the Years Ending December 31,												For the Years Ending December 31,
	2013 ⁽¹⁾			2014			2015			2016 - 2019			2014 ⁽¹⁾			2015			2016			2017 - 2019
Rig Days Committed⁽²⁾
Floaters:
Ultra-Deepwater		88	%		83	%		62	%		20	%		83	%		64	%		26	%		20	%
Deepwater		96	%		54	%		22	%		2	%		61	%		32	%		21	%		1	%
Mid-Water		78	%		56	%		23	%		3	%		62	%		26	%		7	%		1	%
All Floaters		83	%		64	%		35	%		8	%		68	%		39	%		16	%		8	%
Jack-ups		76	%		41	%		20	%		2	%		50	%		36	%		9	%		—

Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows

Regulatory Surveys and Planned Downtime.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 special surveys are generally performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these special surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance activities may result from the special 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 also 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 shipyard time, except for rigs, generally older than 15 years, that are located in the U.K. and Norwegian sectors of the North Sea.

During the ~~final quarter~~remainder of ~~2013, four~~2014, six of our rigs are expected to ~~complete or~~ undergo 5-year surveys. We expect these rigs to be out of service for an estimated ~~234~~238 days in the aggregate to complete the inspections and any shipyard projects scheduled concurrently with the surveys. We also expect to spend an additional approximately ~~198~~640 days during the remainder of ~~2013~~2014 for intermediate surveys, the mobilization of rigs, contract acceptance testing and extended maintenance projects, ~~excluding days associated with commissioning and~~including contract preparation work for theOcean ~~BlackHawk~~Endeavor ~~and~~(approximately 92 days), North Sea enhancements for theOcean ~~Onyx~~Patriotand mobilization of the rig to the U.K. (approximately 196 days) and our service-life-extension project for theOcean Confidence, which ~~are under construction.~~is currently mobilizing to the Canary Islands, where the project is scheduled to commence later in the second quarter of 2014 (approximately 258 days in 2014) and is expected to be completed early in the second quarter of 2015. 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 “ – Contract Drilling Backlog.”

Physical Damage and Marine Liability Insurance.We are self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico. If a named windstorm in the U.S. Gulf of Mexico causes significant damage to our rigs or equipment, it could have a material adverse effect on our financial position, results of operations and cash flows. Under our insurance policy that expires on May 1, 2014, we carry physical damage insurance for certain losses, other than those caused by named windstorms in the U.S. Gulf of Mexico, for which our deductible for physical damage is $25.0 million per occurrence. Our policy’s war risk insurance

excludes from coverage certain ~~nationalization and deprivation coverage for the~~risks of loss of use of rigs and ~~equipment.~~equipment in connection with nationalization and deprivation. We ~~are evaluating the availability and cost of obtaining~~currently retain separate insurance coverage for these risks ~~although there~~in certain countries in which we operate. Additionally, we may, from time to time, seek to obtain insurance coverage for such risks in additional countries in which we may operate in the future to the extent such coverage is available. There is no assurance, however, that we ~~can~~will be able to retain or obtain, as the case may be, adequate ~~insurance~~levels of such coverage for such events at rates and with deductibles that we consider to be ~~reasonable.~~reasonable, or that we will continue to retain such coverage in the future or obtain such coverage in any particular jurisdiction. We do not typically retain loss-of-hire insurance policies to cover our rigs.

In addition, under our insurance ~~policy~~policies that ~~expires~~expire on May 1, 2014, we carry marine liability insurance covering certain legal liabilities, including coverage for certain personal injury claims, with no exclusions for pollution and/or environmental risk. We believe that the policy limit for our marine liability insurance is within the range that is customary for companies of our size in the offshore drilling industry and is appropriate for our business. Our deductibles for marine liability coverage, including for personal injury claims, are $10.0 million for the first occurrence and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims ~~which~~that might arise during the policy year, which under the current policy commences on May 1.

We are in the process of renewing our principal insurance coverages to be effective May 1, ~~of each year.~~2014. We expect our coverage and policy limits for physical damage insurance to be similar to our current policy, and we intend to increase the deductible for our marine liability insurance coverage to $25.0 million for the first occurrence, with no annual aggregate deductible.

Construction and Capital Upgrade Projects.We capitalize interest cost for the construction and upgrade of qualifying assets in accordance with accounting principles generally accepted in the U.S., or GAAP. The period of interest capitalization covers the duration of the activities required to make the asset ready for its intended use, and the capitalization period ends when the asset is substantially complete and ready for its intended use. During the ~~remainder~~first quarter of ~~2013,~~2014, we ~~expect to capitalize~~ceased capitalization of interest ~~on qualifying expenditures~~ related to the construction of ~~our four new drillships,~~ theOcean Onyx,andOcean BlackHawk as a result of the completion of these projects, but will continue to capitalize interest during the remainder of 2014 for our remaining three drillships under construction, theOcean Apexand theOcean GreatWhite. WeCapitalization of interest will continue ~~to capitalize interest pursuant to~~for these construction projects until such time, after the delivery of each rig, that activities related to making each respective vessel ready for service are no longer ongoing.

Consequently, we expect our reported interest expense to increase in 2014, compared to the previous year, as a result of fewer projects qualifying for capitalization of interest in 2014, combined with the impact of additional interest expense associated with fourth quarter of 2013 debt issuances.

Our significant accounting policies are discussed in Note 1 of our notes to unaudited 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, ~~2012.~~2013. There were no material changes to these policies during the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014.

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 applicable accounting standards on segment reporting. 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 to enhance the reader’s understanding of our financial condition, changes in financial condition and results of operations.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
REVENUE EARNING DAYS⁽¹⁾
Floaters:
Ultra-Deepwater		596			549			1,794			1,818			513			526
Deepwater		357			437			1,230			1,214			343			423
Mid-Water		1,037			1,215			3,136			3,481			1,029			1,042
Jack-ups⁽²⁾		542			358			1,459			1,298
Jack-ups														501			448
UTILIZATION⁽³⁾⁽²⁾
Floaters:
Ultra-Deepwater		81	%		75	%		82	%		83	%		66	%		73	%
Deepwater		78	%		95	%		90	%		89	%		64	%		94	%
Mid-Water		63	%		71	%		64	%		67	%		64	%		64	%
Jack-ups⁽⁴⁾		84	%		56	%		76	%		49	%
Jack-ups														79	%		71	%
AVERAGE DAILY REVENUE⁽⁵⁾⁽³⁾
Floaters:
Ultra-Deepwater	$	325,600		$	354,100		$	341,900		$	357,400		$	386,900		$	360,400
Deepwater		413,300			372,800			403,200			367,800			418,300			389,100
Mid-Water		281,900			258,100			271,600			262,100			276,100			261,600
Jack-ups		93,100			97,800			89,100			92,100			93,100			85,200

Comparative data relating to our revenues and operating expenses by equipment type are listed below.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
	(In thousands)												(In thousands)
CONTRACT DRILLING REVENUE
Floaters:
Ultra-Deepwater	$	195,215		$	195,574		$	617,673		$	673,233		$	205,794		$	191,357
Deepwater		147,333			163,816			495,858			452,384			146,559			164,420
Mid-Water		297,368			319,491			891,449			948,548			285,979			305,221
												��
Total Floaters		639,916			678,881			2,004,980			2,074,165			638,332			660,998
Jack-ups		50,825			35,146			130,632			121,278			46,976			38,975

Total Contract Drilling Revenue	$	690,741		$	714,027		$	2,135,612		$	2,195,443		$	685,308		$	699,973

Revenues Related to Reimbursable Expenses	$	15,424		$	15,114		$	58,312		$	40,528		$	24,116		$	29,768
CONTRACT DRILLING EXPENSE
Floaters:
Ultra-Deepwater	$	139,689		$	132,705		$	403,612		$	409,753		$	123,530		$	135,776
Deepwater		74,609			58,029			191,171			185,404			71,949			56,436
Mid-Water		165,518			135,935			448,417			459,227			134,046			143,647

Total Floaters		379,816			326,669			1,043,200			1,054,384			329,525			335,859
Jack-ups		28,685			24,245			85,729			84,928			28,029			29,667
Other		10,987			6,367			34,689			20,323			12,236			9,568

Total Contract Drilling Expense	$	419,488		$	357,281		$	1,163,618		$	1,159,635		$	369,790		$	375,094

Reimbursable Expenses	$	14,904		$	14,563		$	56,998		$	39,351		$	23,666		$	29,289
OPERATING INCOME
Floaters:
Ultra-Deepwater	$	55,526		$	62,869		$	214,061		$	263,480		$	82,264		$	55,581
Deepwater		72,724			105,787			304,687			266,980			74,610			107,984
Mid-Water		131,850			183,556			443,032			489,321			151,933			161,574

Total Floaters		260,100			352,212			961,780			1,019,781			308,807			325,139
Jack-ups		22,140			10,901			44,903			36,350			18,947			9,308
Other		(10,987	)		(6,367	)		(34,689	)		(20,323	)		(12,236	)		(9,568	)
Reimbursable expenses, net		520			551			1,314			1,177			450			479
Depreciation		(97,143	)		(99,207	)		(291,107	)		(300,069	)		(107,011	)		(96,821	)
General and administrative expense		(15,240	)		(13,476	)		(48,490	)		(49,803	)		(22,827	)		(16,815	)
Bad debt (expense) recovery		(22,563	)		—			(22,563	)		1,018
Gain on disposition of assets		525			208			2,789			79,285			147			2,004
								��
Total Operating Income	$	137,352		$	244,822		$	613,937		$	767,416		$	186,277		$	213,726

Other income (expense):
Interest income		136			773			1,024			4,052			408			617
Interest expense		(1,693	)		(8,720	)		(17,713	)		(36,780	)		(18,155	)		(8,069	)
Foreign currency transaction loss		(4,556	)		(1,860	)		(3,949	)		(881	)		(1,178	)		159
Other, net		326			(168	)		746			(767	)		327			(254	)

Income before income tax expense		131,565			234,847			594,045			733,040			167,679			206,179
Income tax expense		(36,817	)		(56,661	)		(137,974	)		(168,224	)		(21,869	)		(30,190	)

NET INCOME	$	94,748		$	178,186		$	456,071		$	564,816		$	145,810		$	175,989

The following is a summary as of the date of this report of the most significant transfers of our rigs during ~~2013~~2014 and ~~2012~~2013 between the geographic areas in which we operate:

During the third quarter of 2013, based on our assessment of the financial condition of two of our customers, Niko and OGX, and our current expectations regarding the probability of collection of amounts due to us from them, we recorded $22.6 million in bad debt expense to fully reserve all outstanding receivables they owed us at June 30, 2013. In addition, during the third quarter of 2013, a total of four of our rigs were contracted to Niko and OGX, working an aggregate 213 revenue earning days during the period. In accordance with GAAP, we did not recognize revenue associated with these revenue earning days due to our assessment that collection of the amounts due was not reasonably assured, resulting in the “unrecognized revenue.”

The following table sets forth the number of revenue earning days, unrecognized revenue and the incremental effect on our historical results of operations for the comparative three and nine-month periods ended September 30, 2013 and 2012 associated with the four rigs contracted to Niko and OGX during the third quarter of 2013 discussed above:

Operating Income.Operating income decreased ~~$107.5~~$27.4 million, or ~~44%~~13%, during the ~~third~~first quarter of ~~2013,~~2014, compared to the same period of ~~2012,~~2013, primarily due to ~~the combined impact of~~ a ~~$23.3~~$14.7 million, or 3%2%, reduction in contract drilling revenue combined with increases in depreciation expense ($10.2 million) and general and administrative expense ($6.0 million), primarily related to higher compensation costs during the current year quarter. The increase in depreciation expense during the current year quarter is primarily the result of a ~~$62.2~~higher depreciable asset base in 2014, compared to the prior year quarter, which includes theOcean Onyx andOcean BlackHawk that were placed in service in the first quarter of 2014. These unfavorable results, which reduced operating income, were partially offset by a $5.3 million ~~or 17%, increase~~net decrease in contract drilling expense ~~and $22.6 million in bad debt expense recognized~~ during the ~~third~~first quarter of ~~2013.~~2014, compared to the prior year quarter.

Contract drilling revenue for our ~~combined floater fleet~~deepwater and mid-water fleets decreased ~~$39.0~~$37.1 million during the first quarter of 2014, compared to the same quarter of 2013, primarily ~~due to~~as a result of an aggregate ~~211~~of 93 fewer revenue ~~earnings~~earning days, ~~during the current year quarter,~~ combined with the effect of alower mobilization and contract preparation fees for our mid-water floaters in the first quarter of 2014, compared to the prior year quarter. This reduction in revenue was partially offset by higher average ~~dayrate~~daily revenue earned by both our deepwater and mid-water floater fleets in the first quarter of 2014. In contrast, contract drilling revenue earned by our ultra-deepwater ~~floaters. The decrease in~~floaters and jack-up rigs increased by an aggregate of $22.4 million during the first quarter of 2014, compared to the prior year quarter, primarily due to a higher average daily revenue ~~for~~earned by our ultra-deepwater floaters ~~was primarily~~($13.6 million) and the ~~result~~combined effects of ~~unrecognized~~an increase in revenue ~~for the~~~~Ocean Monarch~~ ~~during the third quarter of 2013. The reduction in contract drilling revenue for our floater fleet was partially offset by $15.7 million in incremental~~earning days and a higher average daily revenue earned by our jack-up fleet ($8.5 million).

Interest Expense.Interest expense increased $10.1 million during the ~~third~~first quarter of ~~2013,~~2014, compared to the same period in ~~2012. Contract drilling expense for our rig fleet as a whole increased $62.2 million during the third quarter of~~ 2013, compared to the same quarter of the prior year, reflecting $21.3 million in higher labor and personnel-related costs, primarily as a result of a rig-based salary increase beginning in the third quarter of 2013 and costs associated with crewing up our newbuild rigs, higher rig repair and maintenance costs of $23.1 million and higher recognized rig mobilization costs of $11.1 million.

~~Interest Expense.~~~~Interest expense decreased $7.0 million during the third quarter of 2013, compared to the same period in 2012,~~ primarily due to ~~a $10.1 million increase in interest capitalized on eligible construction projects during the third quarter of 2013, partially offset by~~ incremental interest expense of ~~$3.1~~$11.4 million ~~associated with changes~~related to $1.0 billion in ~~uncertain tax positions.~~senior unsecured notes that we issued in November 2013.

Income Tax Expense.Our effective tax rate for the three months ended ~~September 30, 2013~~March 31, 2014 was ~~28.0%~~13.0%, compared to a ~~24.1%~~14.6% effective tax rate for the three months ended ~~September 30, 2012.~~March 31, 2013. The effective tax rate in the ~~2013~~2014 period was ~~higher~~lower than in the same period of 2012 primarily due to the mix of our domestic and international pre-tax earnings and losses which included the tax impact of bad debt expense and unrecorded revenue associated with the risk of uncollectability of amounts owed to us by Niko and OGX.

~~Operating Income.~~Operating income decreased $153.5 million, or 20%, in the first nine months 2013, compared to the same period of 2012, primarily due to a $59.8 million, or 3%, reduction in contract drilling revenue earned, recognition of $22.6 million in bad debt expense and the absence of an aggregate $79.1 million gain on the sale of six of our jack-up rigs recognized in the first nine months of 2012. These negative factors affecting operating income were partially offset by an $9.0 million reduction in depreciation expense during the 2013 period, primarily attributable to the jack-up rigs that were sold and four rigs that were cold stacked at the end of 2012.

Contract drilling revenue for our ultra-deepwater and mid-water fleets decreased a combined $112.7 million during the first nine months of 2013, compared to the prior year nine-month period, while revenue earned by our deepwater floaters and jack-up rigs increased an aggregate $52.8 million, comparing the same periods. Contract drilling expense for our entire rig fleet increased $4.0 million comparing the periods. Aggregate fleet-wide increases in labor and personnel-related costs ($28.7 million), repairs and maintenance ($18.2 million) and inspection costs ($5.5 million) were partially offset by decreased costs associated with the mobilization of rigs ($32.9 millions), freight ($8.9 million) and other rig operating costs ($6.6 million).

~~Interest Expense.~~Interest expense decreased $19.1 million during the nine-month period ended September 30, 2013, compared to the same period in 2012, primarily due to a $27.5 million increase in interest capitalized on eligible construction projects during 2013 partially offset by an $8.4 million increase in interest expense during the period, primarily related to an additional $6.3 million in interest expense associated with uncertain tax positions in the Mexico tax jurisdiction.

~~Income Tax Expense~~. Our effective tax rate for the nine months ended September 30, 2013 was 23.2%, compared to a 23.0% effective tax rate for the nine months ended September 30, 2012. The slightly higher effective tax rate in the 2013 period was partially due to the mix of our domestic and international pre-tax earnings and ~~losses which included the tax impact of bad debt expense and unrecorded revenue associated with the risk of uncollectability of amounts owed to us by Niko and OGX. Tax expense for the 2013~~losses. The 2014 period also included ~~$11.9 million~~the settlement of ~~tax expense associated with settling the 2004 and 2006 tax years~~certain disputes in ~~Mexico under an amnesty program which was partially offset by the reversal of $2.8 million of tax expense associated with the expiration of the statute of limitations in Mexico~~Egypt for the ~~2007 tax year. Additionally, the 2013 period included a $27.5~~years 2006 through 2008, resulting in an aggregate $17.2 million reduction in tax ~~expense resulting from~~expense. During the 2013 period we recognized the impact of The American Taxpayer Relief Act of 2012, which ~~was signed into law on January 2, 2013. However, the effective~~reduced 2013 income tax ~~rate for the nine months ended September 30, 2012 was favorably impacted~~expense by ~~the sale of two jack-up rigs at a zero tax rate during the 2012 period.~~$27.5 million.

Ultra-Deepwater Floaters.Revenue generated by our ultra-deepwater floaters ~~remained relatively stable~~increased $14.4 million in the ~~third~~first quarter of ~~2013,~~2014, compared to the prior year quarter, as a result of ~~a decline in~~higher average daily revenue earned ($~~17.0~~13.6 million) combined with a $5.4 million increase in amortized mobilization revenue during the current year quarter, partially offset by the ~~favorable~~unfavorable effect of ~~47 incremental~~13 fewer revenue earning days ($~~16.6~~4.6 million). ~~Revenue earning days during the third quarter of 2013~~Average daily revenue increased primarily due to ~~less unscheduled~~theOcean Confidence operating under a new contract in Cameroon during the first quarter of 2014 at a significantly higher dayrate than earned in Angola in the prior year quarter. Revenue for the first quarter of 2014 also included $4.5 million in revenue recognized in connection with the completion of theOcean Confidence’s contract in Angola and subsequent move to Cameroon. Revenue earning days decreased during the first quarter of 2014, compared to the prior year quarter, primarily due to incremental downtime ~~(42 fewer~~for theOcean Monarch whose contract was terminated during the fourth quarter of 2013 due to customer credit issues (90 additional days) and ~~a reduction in planned downtime for shipyard projects (90 fewer~~rig mobilizations (24 additional days), partially offset by 88fewer non-operating days ~~during which the~~~~Ocean Monarch~~ ~~worked~~ for ~~Niko~~shipyard projects (21 fewer days) and ~~the associated revenue was not recognized.~~ unscheduled downtime for repairs (81 fewer days).

Contract drilling expense ~~incurred by~~for our ultra-deepwater floaters decreased $12.2 million during the ~~third~~first quarter of 2014, compared to the first quarter of 2013, ~~increased $7.0 million, compared to the third quarter of 2012,~~ reflecting ~~higher~~lower costs incurred for labor and ~~personnel-related costs~~benefits ($~~6.5~~1.9 million), ~~as well as higher costs for~~ rig repairs and maintenance ($~~1.9~~5.6 million), mobilization of rigs ($~~1.1~~3.7 million) and ~~shorebase support~~inspections ($~~1.1~~2.8 million), partially offset by ~~reduced inspection~~higher overhead costs ($~~4.0~~2.8 million)~~, compared to the 2012 quarter.~~.

Deepwater Floaters.Revenue generated by our deepwater floaters decreased ~~$16.5~~$17.9 million in the ~~third~~first quarter of ~~2013,~~2014, compared to the same quarter in ~~2012,~~2013, primarily due to 80 fewer revenue earning days ($~~30.0~~30.9 million) in the current year quarter, partially offset by higher average daily revenue earned ($~~14.4~~10.0 million). and $3.0 million in revenue recognized in connection with theOcean America’s contract offshore Australia. The reduction in revenue earning days was the result of incremental scheduled downtime for surveys ~~and shipyard projects during~~(65 additional days) combined with unplanned downtime associated with the ~~third quarter~~warm stacking of ~~2013 (45~~rigs between contracts (83 additional days), ~~primarily due to planned downtime~~partially offset by 61 revenue earning days for theOcean ~~America~~Onyx~~’s 5-year survey, and 31 days~~, which was placed into service in ~~the third quarter of 2013 during which the~~~~Ocean Star~~ ~~worked for OGX and the associated revenue was not recognized.~~January 2014. The increase in average daily revenue was primarily attributable to theOcean ~~Valiant~~Victory~~currently working~~and Ocean America, both of which worked in the first quarter of 2014 at a significantly higher ~~dayrate~~dayrates than ~~that~~those earned during the ~~third~~first quarter of ~~2012.~~2013.

Contract drilling expense incurred by our deepwater floaters increased ~~$16.6~~$15.5 million during the ~~third~~first quarter of ~~2013,~~2014, compared to the same quarter of ~~2012,~~2013, primarily due to incremental operating costs for theOcean Onyx ($7.6 million) and costs associated with ~~the~~a five-year survey for theOcean ~~America~~Alliance($~~6.2~~6.5 million) ~~and higher labor ($3.2 million) and repair and maintenance ($5.6 million) costs.~~.

Mid-Water Floaters.Revenue generated by our mid-water floaters decreased ~~$22.1~~$19.2 million in the ~~third~~first quarter of ~~2013,~~2014, compared to the same quarter in ~~2012,~~2013, primarily ~~a result~~due to the absence of ~~178~~mobilization and contract preparation revenue earned in the first quarter of 2013 in connection with contracts for theOcean Lexington andOcean Saratoga ($31.0 million) combined with the effect of 13 fewer revenue earning days during the first quarter of 2014 ($~~46.0~~3.2 million). The reduction in revenue earning days during the first quarter of 2014, compared to the same quarter of the prior year, reflects the net impact of increased downtime associated with the North Sea enhancement project for theOcean Patriot (90 additional days), partially offset by ~~higher~~a reduction in planned downtime for surveys and shipyard projects (77 fewer days). These reductions in contract drilling revenue were partially offset by an increase in average daily revenue earned ($~~24.7~~15.0 million) during the current year ~~quarter. The decline in revenue earning days reflects a net increase in planned downtime for mobilization and shipyard projects (64 additional days),~~quarter, primarily due to several of our mid-water floaters operating at higher dayrates during the ~~warm stacking of rigs between contracts (43 additional days), and 94 days in the third~~first quarter of ~~2013 during which the~~~~Ocean Quest~~ ~~and~~~~Ocean Lexington~~~~worked for OGX and Niko, respectively, and the associated revenue was not recognized. The decrease in revenue earning days in the third quarter of 2013,~~2014, compared to the third quarter of 2012, was partially offset by less unplanned downtime for repairs (23 fewer days). Average daily revenue increased during the third quarter of 2013, primarily as a result of a new contract for the~~Ocean General~~ ~~in Vietnam which commenced in June 2013 and a contract renewal for the~~~~Ocean Vanguard~~ ~~in July 2013, both of which are at significantly higher dayrates than those earned in the third quarter of 2012.~~prior year quarter.

Contract drilling expense ~~increased $29.6~~decreased $9.6 million in the ~~third~~first quarter of ~~2013,~~2014, compared to the prior year quarter, primarily due to ~~incremental~~reduced operating costs for theOcean ~~Nomad~~Patriot~~and~~ ~~Ocean Princess~~ ~~($18.2~~($6.5 million), ~~both of~~ which ~~were undergoing~~commenced its shipyard ~~surveys~~project in the fourth quarter of 2013, ~~quarter. Contract drilling expense~~combined with lower costs for rig repairs and maintenance ($4.3 million) and inspections ($3.7 million), partially offset by higher labor and personnel-related costs ($2.9 million) and mobilization costs ($1.9 million) for the other rigs in our mid-water fleet.

Jack-ups.Contract drilling revenue for our jack-up fleet ~~reflected higher labor, repair and maintenance costs and mobilization costs for~~increased $8.0 million during the ~~third~~first quarter of ~~2013,~~2014, compared to the prior year quarter, primarily due to $7.9 million in contract drilling revenue earned by theOcean King, which had been warm stacked in Montenegro, Italy, and did not begin operating in the GOM until the second quarter of 2013. Contract drilling expense decreased $1.6 million in the first quarter of 2014, compared to the same period in ~~2012.~~

~~Jack-ups.~~~~Contract drilling revenue and expense for our jack-up fleet increased $15.7 million and $4.4 million, respectively, in the third quarter of~~ 2013, ~~compared to the same period in 2012. Revenue increased in the current year quarter,~~ primarily due to ~~a 184-day increase in revenue earning days ($18.0 million). The increase in revenue earning days was primarily attributable to~~ the ~~near full utilization~~absence of the mobilization costs incurred by theOcean King~~and~~~~Ocean Spur~~~~during the third quarter of 2013, compared to~~ in the prior year quarter ~~when the~~~~Ocean King~~~~was warm stacked in Montenegro and the~~~~Ocean Spur~~~~was mobilizing to its bareboat charter location in Ecuador. The~~~~Ocean King~~ ~~commenced operations under a short-term contract in the GOM in the second quarter of 2013. This increase was partially offset by a decline in average daily revenue~~ ($~~2.6 million). Contract drilling expense increased as a result of $2.1 million of incremental costs for the~~~~Ocean King~~~~, as well as higher costs associated with labor, mobilization, repairs, and inspections for the remainder of our jack-up fleet during the third quarter of 2013, compared to the prior year quarter.~~

~~Ultra-Deepwater Floaters.~~Revenue generated by our ultra-deepwater floaters decreased $55.6 million in the first nine months of 2013, compared to the same period in 2012, primarily due to lower average daily revenue earned ($27.9 million), 24 fewer revenue earning days ($8.7 million) and a $19.0 million reduction in amortized mobilization revenue. Average daily revenue decreased during the first nine months of 2013, compared to the first nine months of 2012, primarily due to a contract extension for the~~Ocean Rover~~, in the middle of the second quarter of 2012, at a significantly lower dayrate than previously earned. In addition, average daily revenue was further reduced by the effect of a decrease in the operating dayrate earned by the~~Ocean Clipper~~ as a result of 23 additional revenue earning days during which reduced performance rates were earned, the assessment of equipment penalties against revenue and the absence of additional revenue associated with the rig working outside its normal operating zone during the 2013 period. Mobilization revenue decreased primarily due to the recognition of $16.2 million in amortized revenue associated with the~~Ocean Monarch’s mobilization to Vietnam and $4.0 million associated with the~~~~Ocean Rover~~’s demobilization from Indonesia to Malaysia during the first nine months of 2012. Contract drilling expense incurred by our ultra-deepwater floaters decreased $6.1 million during the first nine months of 2013, compared to the same period of 2012, primarily due to lower amortized mobilization costs ($16.8 million) and freight costs ($8.34.3 million), partially offset by higher labor and personnel costs ~~($18.8 million).~~

~~Deepwater Floaters.~~~~Revenue generated~~incurred by our ~~deepwater floaters increased $43.5 million during the first nine months of 2013, compared to the same period in 2012, as a result of higher average daily revenue earned~~jack-up fleet ($43.5 million) and 16 incremental revenue earning days ($5.7 million), partially offset by lower amortized mobilization revenue ($5.8 million). Average daily revenue earned by our deepwater floaters during the first nine months of 2013 increased primarily due to the~~Ocean Valiant~~ ~~and~~~~Ocean Victory~~working at significantly higher dayrates than those earned during the first nine months of 2012. Contract drilling expense increased $5.8 million in the first nine months of 2013, compared to the same period in 2012, reflecting higher labor and other personnel-related costs ($8.2 million), shorebase support costs and overheads ($5.4 million), partially offset by lower costs associated with the mobilization of rigs ($6.7 million) and inspections ($1.9 million).

~~Mid-Water Floaters.~~Revenue generated by our mid-water floaters decreased $57.1 million during the first nine months of 2013, compared to the same period in 2012, primarily as a result of 345 fewer revenue earning days ($90.5 million), partially offset by the effect of higher average daily revenue earned ($29.9 million) and the incremental recognition of mobilization and contract preparation fees ($3.52.4 million) during the first ~~nine months 2013. The decrease in revenue earning days was primarily due to an increase in planned downtime for shipyard inspections and projects (292 additional days), cold stacking the~~~~Ocean Whittington~~ ~~at the end of 2012 (273 additional days) and revenue generating days for the~~~~Ocean Quest~~~~and~~~~Ocean Lexington~~ for which the associated revenue was not recognized (94 days), partially offset by fewer days related to the warm stacking of rigs between contracts (130 fewer days), mobilization of rigs (110 fewer days) and downtime for unscheduled repairs (74 fewer days). Average daily revenue increased primarily as a result of higher dayrates earned in the first nine months of 2013, compared to the same period in the prior year, primarily due to new contracts for the~~Ocean General~~ ~~in Vietnam and~~~~Ocean Nomad~~ ~~and a contract renewal for the~~~~Ocean Vanguard.~~

~~Contract drilling expense decreased $10.8 million during the first nine months of 2013, compared to the same period in 2012, primarily due to reduced costs for the~~~~Ocean Whittington~~~~and~~ ~~Ocean Ambassador~~ ~~($40.2 million), as well as the absence of costs associated with the 2012 demobilization of the~~~~Ocean Guardian~~ from the Falkland Islands ($14.3 million) and repair and maintenance activities after arriving in the U.K. ($8.9 million). The reduction in contract drilling expense during the first nine months of 2013, compared to the first nine months of 2012, was partially offset by higher costs for the remainder of our mid-water fleet, primarily for labor and other personnel-related costs ($5.9 million), repairs and maintenance ($22.1 million), inspections ($14.5 million), mobilization of rigs ($5.3 million) and other rig-related costs ($4.8 million).

~~Jack-ups.~~~~Contract drilling revenue and expense for our jack-up rigs increased $9.4 million and $0.8 million, respectively, in the first nine months of 2013, compared to the same period in 2012. The~~~~Ocean King~~~~, after having been warm stacked throughout 2012 in Montenegro and returning to the GOM in early 2013, commenced operations in the second~~ quarter of 2013, contributing incremental revenue and contract drilling expense of $17.4 million and $9.2 million, respectively, during the first nine months of 2013. The increase in both contract drilling revenue and expense during the first nine months of 2013 was partially offset by the absence of $5.4 million in revenue and $7.2 million in costs for the first nine months of 2012 attributable to our six jack-up rigs that were sold in the first half of 2012. In addition, the~~Ocean Spur~~began operating under a two-year bareboat charter in the third quarter of 2012 at a lower rate than previously earned during the first nine months of 2012, reducing revenues by $3.1 million during the first nine months of 2013, compared to the prior year period.2014.

We have historically relied principally on our cash flows from operations and cash reserves to meet liquidity needs and fund our cash requirements. In addition, we currently have available a ~~$750 million~~$1.0 billion credit facility ~~or Credit Facility,~~ to meet our short-term and long-term liquidity needs. See“– Credit ~~Facility.~~Agreement.” As of ~~October~~April 23, ~~2013,~~2014, our contract drilling backlog was ~~$7.4~~$6.5 billion, of which ~~$0.7~~$2.0 billion is expected to be ~~earned~~realized in the last ~~quarter~~nine months of ~~2013.~~2014.

At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, we had cash available for current operations as follows:


					March 31,		December 31,
	September 30, 2013		December 31, 2012		2014		2013
	(In thousands)				(In thousands)
Cash and equivalents	$	438,794	$	335,432	$	420,140	$	347,011
Marketable securities		800,204		1,150,158		1,175,135		1,750,053

Total cash available for current operations	$	1,238,998	$	1,485,590	$	1,595,275	$	2,097,064

A substantial portion of our cash flows has been and is expected to continue to be invested in the enhancement of our drilling fleet. We determine the amount of cash required to meet our capital commitments by evaluating our rig construction obligations, the need to upgrade rigs to meet specific customer requirements and our ongoing rig equipment enhancement/replacement programs.

Certain of our international rigs are owned and operated, directly or indirectly, by Diamond Offshore International Limited, or DOIL, and, as a result of our intention to indefinitely reinvest the earnings of DOIL to finance our foreign activities, we do not expect such earnings to be available for distribution to our stockholders or to finance our domestic activities. We expect to utilize the operating cash flows generated by and cash reserves of DOIL and the operating cash flows available to and cash reserves of Diamond Offshore Drilling, Inc. to meet each

entity’s respective working capital requirements and capital commitments. However, ~~due to~~in light of the significant cash requirements of our capital expansion program in ~~2013~~2014 and ~~2014,~~2015, we may also make use of our ~~Credit Facility or the possible issuance of debt or equity securities, or a combination thereof,~~credit facility to finance our capital expenditures, working capital requirements and/or to maintain a certain level of operating cash reserves. In addition, we will make periodic assessments of our capital spending programs based on industry conditions and make adjustments thereto if required. ~~Our ability to access the capital markets by issuing debt or equity securities will be dependent on our results of operations, our current financial condition, current market conditions~~See “ — Cash Flow, Capital Expenditures and ~~other factors beyond our control. See “—~~Contractual Obligations — Contractual Cash Obligations — Rig Construction” and “—Credit ~~Facility.~~Agreement.”

We pay dividends at the discretion of our Board of Directors, or Board, and, in recent years, we have a history of paying both regular quarterly and special cash dividends. During the ~~nine-month period~~three-month periods ended ~~September 30,~~March 31, 2014 and 2013, we paid regular cash dividends totaling $17.4 million in each period and special cash dividends totaling ~~$52.1~~$105.3 million and ~~$315.8 million, respectively. During the nine-month period ended September 30, 2012, we paid regular and special cash dividends totaling $52.1 million and $315.8~~$104.9 million, respectively. Our Board has adopted a policy to consider paying special cash dividends, in amounts to be determined, on a quarterly basis. Our Board may, in subsequent quarters, consider paying additional special cash dividends, in amounts to be determined. Any determination to declare a special cash dividend, as well as the amount of any special cash dividend which may be declared, will be based on our financial position, earnings, earnings outlook, capital spending plans and other factors that our Board considers relevant at that time.

On ~~October~~April 23, ~~2013,~~2014, we declared a regular cash dividend and a special cash dividend of $0.125 and $0.75, respectively, per share of our common stock. Both the quarterly and special cash dividends are payable on ~~December~~June 2, ~~2013~~2014 to stockholders of record on ~~November 5, 2013.~~

During the nine-month period ended September 30, 2013, our primary source of cash was an aggregate $857.9 million generated from operating activities and $350.4 million in proceeds, primarily from the maturity of marketable securities, net of purchases. Our primary uses of cash during the same period were $740.5 million towards the construction of new rigs and our ongoing rig equipment enhancement/replacement program and $367.9 million for the payment of dividends.

During the nine-month period ended September 30, 2012, our primary source of cash was an aggregate $1,009.6 million generated from operating activities and $136.9 million of proceeds, primarily from the sale of six of our jack-up rigs. Our primary uses of cash during the same period were $514.7 million towards the construction of new rigs and our ongoing rig equipment enhancement/replacement program, $277.5 million toward the purchase of marketable securities, net of sales, and $367.9 million for the payment of dividends.May 7, 2014.

Depending on market and other conditions, we may, from time to time, purchase shares of our common stock in the open market or otherwise. During the three-month period ended March 31, 2014, we purchased 1,865,311 shares of our common stock at an aggregate cost of $86.4 million. See Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II of this report. We did not ~~repurchase~~purchase any shares of our outstanding common stock during the ~~years~~three-month period ended ~~December~~March 31, ~~2011 or 2012 or in the nine months ended September 30,~~ 2013. In addition, Loews Corporation, or Loews, has informed us that, depending on market and other conditions, it may, from time to time, purchase shares of our common stock in the open market or otherwise. Loews did not purchase any shares of our outstanding common stock during the ~~years~~three-month periods ended ~~December~~March 31, ~~2011~~2014 or ~~2012~~2013.

During the three-month period ended March 31, 2014, our primary source of cash was an aggregate $303.0 million generated from operating activities and $575.1 million in proceeds, primarily from the maturity of marketable securities, net of purchases. Our primary uses of cash during the same period were $595.3 million

towards the construction of new rigs and our ongoing rig equipment enhancement/replacement program, $122.7 million for the payment of dividends and $86.4 million for the repurchase of shares.

During the three-month period ended March 31, 2013, our primary source of cash was an aggregate $276.1 million generated from operating activities. Our primary uses of cash during the same period were $183.7 million towards the construction of new rigs and our ongoing rig equipment enhancement/replacement program and $122.3 million for the payment of dividends.

We may, from time to time, issue debt or inequity securities, or a combination thereof, to finance capital expenditures, the ~~nine months ended September 30, 2013.~~acquisition of assets and businesses or for general corporate purposes. Our ability to access the capital markets by issuing debt or equity securities will be dependent on our results of operations, our current financial condition, current market conditions and other factors beyond our control.

Our cash flow from operations and capital expenditures for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~ were as follows:


	Three Months Ended March 31,
	2014		2013
	(In thousands)
Cash flow from operations	$	303,015	$	276,106
Cash capital expenditures:
Drillship construction	$	426,385	$	25,927
Construction of deepwater floaters		17,399		133,903
Construction of ultra-deepwater floater		3,715		—
Ocean Patriot enhancement project		13,122		8,224
Rig equipment and replacement programs		134,693		15,665

Total capital expenditures	$	595,314	$	183,719

Cash flow from operations ~~decreased~~increased approximately ~~$151.7~~$26.9 million during the first ~~nine~~three months of ~~2013,~~2014, compared to the first ~~nine~~three months of ~~2012,~~2013, primarily due to a ~~$109.9~~$43.5 million ~~decrease~~increase in cash receipts from contract drilling services and lower cash income taxes paid, net of refunds, of $37.7 million, partially offset by higher cash payments related to contract drilling expenses of ~~$40.9 million and higher cash income taxes paid, net of refunds, of $0.9~~$54.3 million.

As of the date of this report, we expect our capital spending infor 2014 to aggregate approximately $2.1 billion, of which approximately $1.5 billion, $82.0 million and $184.0 million will be spent on our rig construction projects, the ~~final quarter of 2013 to be approximately $730 million in the aggregate, including the final installments due under our shipyard contracts~~Ocean Patriot North Sea enhancement project and a service-life-extension project for theOcean ~~BlackHawk~~Confidence ~~and~~~~Ocean Onyx~~~~. We are~~, respectively. During the first three months of 2014, we incurred $540.0 million in the process of compiling our capital expenditure budget for 2014 and have not yet finalized our spending plan for the year; however, we do expect to spend approximately $1.5 billion towards our current rig construction projects.project-related expenditures, including accrued expenditures. See “—“ — Contractual Cash Obligations — Rig Construction.” Our 2014 capital spending program also includes an estimated $285.0 million for our ongoing capital maintenance and replacement programs of which $54.3 million had been incurred as of March 31, 2014.

~~In May 2013,~~As of the date of this report, we ~~entered into an agreement with Hyundai Heavy Industries, Co., Ltd., or Hyundai, for the construction of a 10,000 foot dynamically positioned, harsh environment semisubmersible drilling rig. The~~~~Ocean GreatWhite~~ ~~is under construction~~have six ongoing rig construction/enhancement projects at three shipyards to which we are financially obligated. Four rigs are being constructed in South Korea ~~at an estimated cost of $755 million, including capital spares, commissioning~~ and ~~shipyard supervision. The contracted price to Hyundai totaling $628.5 million is payable~~two projects are underway in two installments, of which the first installment has been paid. In addition, we are financially obligated under other agreements with several shipyards in connection with the construction of four ultra-deepwater drillships, the deepwater floater~~Ocean Onyx, the deepwater floater~~~~Ocean Apex~~ ~~and the~~~~Ocean Patriot~~ ~~North Sea enhancement project.~~Singapore. See Note 89 “Commitments and Contingencies” to our Consolidated Financial Statements included in Item 1 of Part I of this report for further discussion of these projects.

We had no other purchase obligations for major rig upgrades or any other significant obligations at September 30, 2013, except for those related to our direct rig operations, which arise during the normal course of business.

The following is a summary of our construction projects as of ~~September 30, 2013,~~March 31, 2014, including estimated expenditures to be made during the ~~fourth quarter~~remaining nine months of ~~2013 and in~~ 2014:


					Actual Inception-to-Date				Estimated Expenditures				Actual Inception-to-Date
Project	Expected Delivery ⁽¹⁾		Total Project Cost⁽²⁾		Project Expenditures ⁽³⁾		Capitalized Interest		Q4 2013 ^{(4) (5) (6)}		2014 ^{(4) (6) (7)}		Expected Delivery ⁽¹⁾	Total Project Cost⁽²⁾		Project Expenditures ⁽³⁾		Capitalized Interest		Nine Months 2014 ^(4) (5)
	(In millions)													(In millions)
New Rig Construction:
New Rig Construction:
Drillships:
Ocean BlackHawk		Q4 2013	$	635	$	209	$	22	$	426	$	—
Ocean BlackHornet		Q1 2014		635		195		22		12		428	Q2 2014	$	635	$	212	$	28	$	424
Ocean BlackRhino		Q2 2014		645		182		22		8		456	Q3 2014		645		197		28		449
Ocean BlackLion		Q4 2014		655		170		14		3		436	Q1 2015		655		172		18		33

				2,570		756		80		449		1,320			1,935		581		74		906
Ultra-Deepwater Floater
Ultra-Deepwater Floater:
Ocean GreatWhite		Q1 2016		755		189		4		3		11	Q1 2016		755		191		9		8
Deepwater Floaters:
Ocean Onyx		Q4 2013		335		286		13		56		—
Deepwater Floater:
Ocean Apex		Q3 2014		370		221		5		53		104	Q3 2014		370		291		11		86

			$	4,030	$	1,452	$	102	$	561	$	1,435		$	3,060	$	1,063	$	94	$	1,000
Ocean Patriotenhancement		Q2 2014	$	120	$	13	$	—	$	28	$	79

Enhancement Project:
Mid-Water FloaterOcean Patriot													Q2 2014	$	120	$	67	$	—	$	53

⁽²⁾	Total project costs include contractual payments for shipyard construction, commissioning, capital spares and project management costs; amount does not include capitalized interest.

⁽³⁾	~~Excludes~~Represents total project expenditures from inception of project to March 31, 2014, excluding project-to-date capitalized interest.

⁽⁴⁾	Estimated expenditures for ~~2013 and~~the remaining nine months of 2014, including construction milestone payments, are based on current expected delivery dates for the rigs under construction, and exclude expected capitalized interest costs.

⁽⁵⁾	~~Includes $393.5 million payable to Hyundai and construction~~Construction milestone payments ~~aggregating $21.9 million payable~~expected to ~~Keppel AmFELS, L.L.C.~~be paid in ~~connection with~~ the ~~construction~~remainder of ~~the~~~~Ocean Onyx~~.2014 include:

We had no other purchase obligations for major rig upgrades or any other significant obligations at March 31, 2014, except for those related to our direct rig operations, which arise during the normal course of business.

Our 5.15% Senior Notes due September 1, 2014, or 5.15% Senior Notes, in the aggregate principal amount of $250.0 million, will mature on September 1, 2014.

~~At September 30, 2013,~~As of March 31, 2014, we had foreign currency forward exchange, or FOREX, contracts outstanding in the aggregate notional amount of ~~$151.6 million outstanding.~~$146.1 million. See further information regarding these contracts in “Quantitative and Qualitative Disclosures About Market Risk –Foreign Exchange Risk” in Item 3 of Part I of this report and Note 5 “Derivative Financial Instruments” to our Consolidated Financial Statements in Item 1 of Part I of this report.

As of ~~September 30, 2013,~~March 31, 2014, the total unrecognized tax benefits related to uncertain tax positions was ~~$50.8~~$68.7 million. In addition, we have recorded a liability, as of ~~September 30, 2013,~~March 31, 2014, for potential penalties and interest of ~~$23.8~~$46.2 million and ~~$12.1~~$13.8 million, respectively. Due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities recognized in these balances, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

We have available to us a syndicated ~~5-year revolving credit agreement,~~5-Year Revolving Credit Agreement, or Credit ~~Facility,~~Agreement, that provides for a ~~$750 million~~$1.0 billion senior unsecured revolving credit facility, for general corporate purposes, ~~which matures~~maturing on ~~September 28, 2017.~~March 17, 2019. The entire amount of the facility is available for revolving loans. Up to $250 million of the facility is available for the issuance of performance or other standby letters of credit and up to ~~$75~~$100 million is available for swingline loans. As of ~~September 30, 2013,~~March 31, 2014, there were no loans or letters of credit outstanding under the Credit ~~Facility.~~Agreement. See Note 9 “Credit Agreement” to our Consolidated Financial Statements in Item 1 of Part I of this report.

Our current credit rating is A3 for Moody’s Investors Services and A-A for Standard & Poor’s. Although our long-term ratings continue at investment grade levels, lower ratings could result in higher interest rates on future debt issuances.

We were contingently liable as of ~~September 30, 2013~~March 31, 2014 in the amount of ~~$70.2~~$65.1 million under certain performance, bid, supersedeas and ~~custom~~customs bonds and letters of credit. Agreements relating to approximately ~~$58.2~~$60.5 million of performance, supersedeas and customs bonds can require collateral at any time. As of ~~September 30, 2013,~~March 31, 2014, we had not been required to make any collateral deposits with respect to these agreements. The remaining agreements cannot require collateral except in events of default. Banks have issued letters of credit on our behalf securing certain of these bonds. The table below provides a list of these obligations in U.S. dollar equivalents and their time to expiration.


			For the Years Ending December 31,								For the Years Ending December 31,
	Total		2013		2014		Thereafter		Total		2014		2015		Thereafter
	(In thousands)								(In thousands)
Other Commercial Commitments
Customs bonds	$	1,600	$	792	$	808	$	—	$	1,519	$	1,369	$	150	$	—
Performance bonds		68,030		1,000		19,318		47,712		53,763		1,680		20,977		31,106
Other		595		90		505		—		9,778		9,278		500		—

Total obligations	$	70,225	$	1,882	$	20,631	$	47,712	$	65,060	$	12,327	$	21,627	$	31,106

At ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, we had no off-balance sheet debt or other arrangements.

We or our representatives may, from time to time, either in this report, in periodic press releases or otherwise, make or incorporate by reference certain written or oral statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “may,” “might,” “will,” “will be,” “will continue,” “will likely result,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:

These types of statements are based on current expectations about future events and inherently are subject to a variety of assumptions, risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those expected, projected or expressed in forward-looking statements. These risks and uncertainties include, among others, the following:

The risks and uncertainties included here are not exhaustive. Other sections of this report and our other filings with the SEC include additional factors that could adversely affect our business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward-looking statement is based.

The information included in this Item 3 is considered to constitute “forward-looking statements” for purposes of the statutory safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” in Item 2 of Part I of this report.

Our measure of market risk exposure represents an estimate of the change in fair value of our financial instruments. Market risk exposure is presented for each class of financial instrument held by us at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, assuming immediate adverse market movements of the magnitude described below. We believe that the various rates of adverse market movements represent a measure of exposure to loss under hypothetically assumed adverse conditions. The estimated market risk exposure represents the hypothetical loss to future earnings and does not represent the maximum possible loss or any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. In addition, since our investment portfolio is subject to change based on our portfolio management strategy as well as in response to changes in the market, these estimates are not necessarily indicative of the actual results that may occur.

Exposure to market risk is managed and monitored by our senior management. Senior management approves the overall investment strategy that we employ and has responsibility to ensure that the investment positions are consistent with that strategy and the level of risk acceptable to us. We may manage risk by buying or selling instruments or entering into offsetting positions.

We have exposure to interest rate risk arising from changes in the level or volatility of interest rates. Our investments in marketable securities are primarily in fixed maturity securities. We monitor our sensitivity to interest rate risk by evaluating the change in the value of our financial assets and liabilities due to fluctuations in interest rates. The evaluation is performed by applying an instantaneous change in interest rates by varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on the recorded market value of our investments and the resulting effect on stockholders’ equity. The analysis presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices which we believe are reasonably possible over a one-year period.

The sensitivity analysis estimates the change in the market value of our interest sensitive assets and liabilities that were held on ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, due to instantaneous parallel shifts in the yield curve of 100 basis points, with all other variables held constant.

The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and does not provide a precise forecast of the effect of changes in market interest rates on our earnings or stockholders’ equity. Further, the computations do not contemplate any actions we could undertake in response to changes in interest rates.

Our long-term debt is denominated in U.S. dollars. Our existing debt has been issued at fixed rates, and as such, interest expense would not be impacted by interest rate shifts. The impact of a 100-basis point increase in interest rates on fixed rate debt would result in a decrease in market value of ~~$108.0~~$218.1 million and ~~$131.4~~$221.5 million as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, respectively. A 100-basis point decrease would result in an increase in market value of ~~$124.5~~$261.3 million and ~~$151.1~~$264.5 million as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, respectively.

Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. It is customary for us to enter into FOREX contracts in the normal course of business. These contracts generally require us to net settle the spread between the contracted foreign currency exchange rate and the spot rate on the contract settlement date, which, for most of our contracts, is the average spot rate for the contract period. As of ~~September 30, 2013,~~March 31, 2014, we had FOREX contracts outstanding in the aggregate notional amount of ~~$151.6~~$146.1 million, consisting of ~~$20.7~~$11.6 million in Australian dollars, ~~$86.7~~$71.5 million in Brazilian reais, ~~$20.5~~$32.3 million in British pounds sterling, ~~$11.7~~$24.3 million in Mexican pesos and ~~$12.0~~$6.4 million in Norwegian kroner. These contracts generally settle monthly through ~~June~~December 2014.

At ~~September 30,~~March 31, 2014, we presented the fair value of our outstanding FOREX contracts as a current asset of $4.6 million in “Prepaid expenses and other current assets” and a current liability of $(6,429) in “Accrued liabilities” in our Consolidated Balance Sheets. At December 31, 2013, we presented the fair value of our outstanding FOREX contracts as a current asset of ~~$3.3~~$1.6 million in “Prepaid expenses and other current assets” and a current liability of ~~$(4.3)~~$(1.1) million in “Accrued liabilities” in our Consolidated Balance Sheets. At December 31, 2012, we presented the fair value of our outstanding FOREX contracts as a current asset of $3.6 million in “Prepaid expenses and other current assets” and a current liability of $(29,137) in “Accrued liabilities” in our Consolidated Balance Sheets.

The following table presents our exposure to market risk by category (interest rates and foreign currency exchange rates):


	Fair Value Asset (Liability)						Market Risk						Fair Value Asset (Liability)						Market Risk
	September 30,			December 31,			September 30,			December 31,			March 31,			December 31,			March 31,			December 31,
	2013			2012			2013			2012			2014			2013			2014			2013
	(In thousands)												(In thousands)
Interest rate:
Marketable securities	$	800,200	(a)	$	1,150,200	(a)	$	(800	) (b)	$	(2,200	) (b)	$	1,175,100	(a)	$	1,750,100	(a)	$	(1,150	)(b)	$	(2,200	)(b)
Foreign Exchange:
FOREX contracts – receivable positions		3,300	(c)		3,600	(c)		(17,400	) (d)		(21,600	) (d)		4,600	(c)		1,600	(c)		(26,100	)(d)		(4,200	)(d)
FOREX contracts – liability positions		(4,300	) (c)		(29	) (c)		(9,200	) (d)		(4,900	) (d)		(6	)(c)		(1,100	)(c)		(500	)(d)		(16,000	)(d)

We maintain a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by us in reports that we file or submit under the federal securities laws, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us under the federal securities laws is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure.

Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of ~~September 30, 2013.~~March 31, 2014. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2013.~~March 31, 2014.

There were no changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during our ~~third~~first fiscal quarter of ~~2013~~2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) The following table sets forth information regarding our purchases of shares of our common stock on a monthly basis during the first quarter of 2014:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware		76-0321760
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


	September 30,			December 31,
	2013			2012
	(In thousands)
Trade receivables	$	422,708		$	478,987
Value added tax receivables		17,750			13,884
Amounts held in escrow		12,025			11,555
Related party receivables		353			527
Other		124			165

		452,960			505,118
Allowance for bad debts		(28,152	)		(5,458	)

Total	$	424,808		$	499,660


	March 31,			December 31,
	2014			2013
	(In thousands)
Trade receivables	$	415,146		$	473,013
Value added tax receivables		23,780			19,407
Amounts held in escrow		4,321			3,066
Related party receivables		451			587
Other		116			622

		443,814			496,695
Allowance for bad debts		(27,637	)		(27,340	)

Total	$	416,177		$	469,355


	September 30, 2013				December 31, 2012
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In millions)
4.875% Senior Notes	$	268.1	$	249.9	$	275.5	$	249.8
5.15% Senior Notes		260.0		249.9		269.0		249.9
5.70% Senior Notes		567.9		496.9		641.4		496.9
5.875% Senior Notes		587.1		499.5		617.1		499.5


~~As of October 25, 2013~~		~~Common stock, $0.01 par value per share~~		~~139,035,448 shares~~


Level 1		Quoted prices for identical instruments in active markets. Level 1 assets include short-term investments such as money market funds, U.S. Treasury Bills and Treasury notes. Our Level 1 assets at ~~September 30,~~March 31, 2014 consisted of cash held in money market funds of $386.9 million, time deposits of $20.1 million and investments in U.S. Treasury securities of $1,175.0 million. Our Level 1 assets at December 31, 2013 consisted of cash held in money market funds of ~~$385.6~~$281.3 million, time deposits of ~~$20.0~~$30.0 million and investments in U.S. Treasury securities of ~~$800.0 million. Our Level 1 assets at December 31, 2012 consisted of cash held in money market funds of $284.9 million and investments in U.S. Treasury securities of $1,149.9~~$1,749.9 million.

Level 2		Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities include residential mortgage-backed securities and over-the-counter FOREX contracts. Our residential mortgage-backed securities were valued using a model-derived valuation technique based on the quoted closing market prices received from a financial institution. Our FOREX contracts are valued based on quoted market prices, which are derived from observable inputs including current spot and forward rates, less the contract rate multiplied by the notional amount. The inputs used in our valuation are obtained from a Bloomberg curve analysis which uses par coupon swap rates to calculate implied forward rates so that projected floating rate cash flows can be calculated. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

Level 3		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of transparency as to the inputs used. Our Level 3 assets at September 30, 2013 and December 31, 2012 consisted of nonrecurring measurements of certain rigs held for sale for which we recorded an impairment loss in 2012. The value of these rigs was determined using a present value technique which utilized unobservable inputs such as assumptions for estimated proceeds that may be received on disposition of each rig and estimated costs to sell. See Note 1.


	Unrealized Gain (Loss) on
	FOREX Contracts			Marketable Securities			Total AOCGL
	(In thousands)
Balance at January 1, 2013	$	2,350		$	146		$	2,496
Change in other comprehensive gain (loss) before reclassifications, after tax of $2,638 and $6		(4,901	)		7			(4,894	)
Reclassification adjustments for items included in Net Income, after tax of $(1,033) and $19		1,918			(146	)		1,772

Balance at September 30, 2013	$	(633	)	$	7		$	(626	)


Rig	Rig Type		Relocation Details	Date
*Floaters:*
Ocean ~~Monarch~~	~~Ultra-Deepwater~~		~~Vietnam to Singapore (shipyard survey)~~	~~August 2012~~
~~Ocean~~ Confidence	Ultra-Deepwater		Congo to Angola	January 2013
Ocean Confidence	Ultra-Deepwater		Angola to Cameroon	February 2014
Ocean Endeavor	Ultra-Deepwater		Egypt to Romania via Italy (Black Sea Project)	February 2014
Ocean BlackHawk	Ultra-Deepwater		South Korea to GOM (initial mobilization)	February 2014

Ocean America	Deepwater		Australia to Singapore (shipyard survey)	July 2013
Ocean ~~Guardian~~Valiant	~~Mid-Water~~Deepwater		~~Falkland~~Cameroon to Canary Islands ~~to U.K.~~(shipyard survey)	~~January 2012~~October 2013
Ocean ~~Saratoga~~America	~~Mid-Water~~Deepwater		~~GOM~~Singapore to ~~Guyana~~Australia	~~January 2012~~November 2013
Ocean ~~Saratoga~~Onyx	~~Mid-Water~~Deepwater		~~Guyana to GOM~~Placed in service (GOM)	~~May 2012~~January 2014
~~Ocean Whittington~~		~~Mid-Water~~			~~Brazil to GOM~~^(a)	~~May 2012~~
~~Ocean Apex~~	~~Mid-Water~~		~~Singapore shipyard~~^{(b )}	~~September 2012~~
~~Ocean Ambassador~~	~~Mid-Water~~		~~Brazil to GOM~~	~~October 2012~~
Ocean Lexington	Mid-Water		Brazil to Trinidad	March 2013
Ocean Patriot	Mid-Water		Vietnam to Philippines	May 2013
Ocean Saratoga	Mid-Water		GOM to Nicaragua	August 2013
*~~Jack-ups:~~Ocean Quest*	Mid-Water		Brazil to Malaysia	November 2013
Ocean ~~Columbia~~Patriot	~~Jack-up~~Mid-Water		~~Sold~~Philippines to Singapore (shipyard upgrade)	~~March 2012~~November 2013
Ocean ~~Heritage~~Saratoga	~~Jack-up~~Mid-Water		~~Sold~~	~~April 2012~~
~~Ocean Drake~~	~~Jack-up~~		~~Sold (cold stacked June 2009)~~	~~May 2012~~
~~Ocean Champion~~	~~Jack-up~~		~~Sold (cold stacked June 2009)~~	~~May 2012~~
~~Ocean Crusader~~	~~Jack-up~~		~~Sold (cold stacked June 2009)~~	~~May 2012~~
~~Ocean Sovereign~~	~~Jack-up~~		~~Sold (cold stacked October 2011)~~	~~June 2012~~
~~Ocean Spur~~	~~Jack-up~~		~~Egypt to Ecuador; two year bareboat charter~~	~~August 2012~~
~~Ocean King~~	~~Jack-up~~		~~Montenegro~~Nicaragua to GOM	December ~~2012~~2013


	Revenue Earning Days^(a)		Unrecognized Revenue^(b)			(Unfavorable) Favorable Effect on Revenue For The Periods Ended September 30, 2013 and 2012 ^(c)
Rig-Type	Three Months Ended September 30, 2013					Three Months			Nine Months
	(In millions, except number of days)
Ultra-Deepwater Floater		88	$	(32.8	)	$	(13.2	)	$	(24.6	)
Deepwater Floater		31		(9.3	)		(8.7	)		22.5
Mid-water Floaters		94		(26.1	)		(26.5	)		(83.1	)

		213	$	(68.2	)	$	(48.4	)	$	(85.2	)


	DIAMOND OFFSHORE DRILLING, INC.
	(Registrant)

Date ~~October~~April 30, ~~2013~~2014	By:	\s\ Gary T. Krenek
		Gary T. Krenek
		Senior Vice President and Chief Financial Officer

Date ~~October~~April 30, ~~2013~~2014		\s\ Beth G. Gordon
		Beth G. Gordon
		Controller (Chief Accounting Officer)


Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003) (SEC File No. 1-13926).

3.2		Amended and Restated By-laws (as amended through October 4, 2013) of Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed October 8, 2013).

~~10.1~~^10.1		~~Retirement~~Employment Agreement, ~~and General Release~~dated as of February 12, 2014, between Diamond Offshore ~~Management Company~~Drilling, Inc. and ~~Lawrence R. Dickerson~~Marc Edwards.

10.2*		Commitment Increase and Amendment No. 2 to Credit Agreement, dated ~~September 23, 2013.~~as of March 17, 2014, among Diamond Offshore Drilling, Inc., Wells Fargo Bank, National Association, as an issuing bank, as swingline lender and as administrative agent for the lenders, and the lenders named therein.

10.3		The Diamond Offshore Drilling, Inc. Incentive Compensation Plan for Executive Officers (as Amended and Restated as of March 28, 2014) (incorporated by reference to Exhibit A attached to our definitive proxy statement on Schedule 14A filed April 1, 2014).

10.4		Diamond Offshore Drilling, Inc. Equity Incentive Compensation Plan (incorporated by reference to Exhibit B attached to our definitive proxy statement on Schedule 14A filed April 1, 2014).

10.5*		Form of Award Certificate for grants of Performance Restricted Stock Units under the Equity Incentive Compensation Plan.

31.1*		Rule 13a-14(a) Certification of the Chief Executive Officer.

31.2*		Rule 13a-14(a) Certification of the Chief Financial Officer.

32.1*		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer.

101.INS**		XBRL Instance Document.

101.SCH**		XBRL Taxonomy Extension Schema Document.

101.CAL**		XBRL Taxonomy Calculation Linkbase Document.

101.LAB**		XBRL Taxonomy Label Linkbase Document.

101.PRE**		XBRL Presentation Linkbase Document.

101.DEF**		XBRL Definition Linkbase Document.

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