e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
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|
Delaware
(State or other jurisdiction of incorporation
or organization)
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|
76-0321760
(I.R.S. Employer
Identification No.) |
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
As of October 25, 2007 Common stock, $0.01 par value per share 138,820,382 shares
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2007
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
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September 30, |
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December 31, |
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2007 |
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2006 |
|
ASSETS |
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Current assets: |
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|
|
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|
|
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Cash and cash equivalents |
|
$ |
304,627 |
|
|
$ |
524,698 |
|
Marketable securities |
|
|
375,394 |
|
|
|
301,159 |
|
Accounts receivable |
|
|
545,249 |
|
|
|
567,474 |
|
Rig spare parts and supplies |
|
|
51,215 |
|
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|
48,801 |
|
Prepaid expenses and other |
|
|
77,119 |
|
|
|
39,415 |
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|
|
|
|
|
|
|
Total current assets |
|
|
1,353,604 |
|
|
|
1,481,547 |
|
Drilling and other property and equipment, net of
accumulated depreciation |
|
|
2,864,997 |
|
|
|
2,628,453 |
|
Other assets |
|
|
26,261 |
|
|
|
22,839 |
|
|
|
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|
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Total assets |
|
$ |
4,244,862 |
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|
$ |
4,132,839 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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|
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Current portion of long-term debt |
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$ |
9,420 |
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|
$ |
|
|
Accounts payable |
|
|
115,441 |
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|
122,000 |
|
Accrued liabilities |
|
|
168,115 |
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|
184,978 |
|
Taxes payable |
|
|
40,037 |
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|
26,531 |
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|
|
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|
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Total current liabilities |
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333,013 |
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333,509 |
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Long-term debt |
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|
503,011 |
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|
964,310 |
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Deferred tax liability |
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|
409,136 |
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|
448,227 |
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Other liabilities |
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|
103,623 |
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|
67,285 |
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Total liabilities |
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1,348,783 |
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|
1,813,331 |
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Commitments and contingencies (Note 8) |
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Stockholders equity: |
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Common stock (par value $0.01, 500,000,000 shares authorized,
143,631,625 shares issued and 138,714,825 shares outstanding
at September 30, 2007; 134,133,776 shares issued and
129,216,976 shares outstanding at December 31, 2006) |
|
|
1,436 |
|
|
|
1,341 |
|
Additional paid-in capital |
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|
1,823,946 |
|
|
|
1,299,846 |
|
Retained earnings |
|
|
1,185,013 |
|
|
|
1,137,151 |
|
Accumulated other comprehensive gain (loss) |
|
|
97 |
|
|
|
(4,417 |
) |
Treasury stock, at cost (4,916,800 shares at September 30,
2007 and December 31, 2006) |
|
|
(114,413 |
) |
|
|
(114,413 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,896,079 |
|
|
|
2,319,508 |
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|
|
|
|
|
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|
Total liabilities and stockholders equity |
|
$ |
4,244,862 |
|
|
$ |
4,132,839 |
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|
The accompanying notes are an integral part of the consolidated financial statements.
3
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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|
2007 |
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|
2006 |
|
Revenues: |
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|
|
|
|
|
|
|
|
|
|
|
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Contract drilling |
|
$ |
628,246 |
|
|
$ |
498,453 |
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|
$ |
1,854,085 |
|
|
$ |
1,431,496 |
|
Revenues related to reimbursable expenses |
|
|
15,716 |
|
|
|
16,003 |
|
|
|
46,936 |
|
|
|
42,878 |
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Total revenues |
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643,962 |
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514,456 |
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1,901,021 |
|
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1,474,374 |
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Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Contract drilling |
|
|
282,100 |
|
|
|
224,883 |
|
|
|
719,833 |
|
|
|
599,271 |
|
Reimbursable expenses |
|
|
13,584 |
|
|
|
13,982 |
|
|
|
40,226 |
|
|
|
37,083 |
|
Depreciation |
|
|
57,565 |
|
|
|
49,757 |
|
|
|
171,605 |
|
|
|
148,858 |
|
General and administrative |
|
|
13,105 |
|
|
|
9,959 |
|
|
|
37,245 |
|
|
|
29,786 |
|
(Gain) loss on disposition of assets |
|
|
(363 |
) |
|
|
(272 |
) |
|
|
(5,418 |
) |
|
|
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total operating expenses |
|
|
365,991 |
|
|
|
298,309 |
|
|
|
963,491 |
|
|
|
817,189 |
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating income |
|
|
277,971 |
|
|
|
216,147 |
|
|
|
937,530 |
|
|
|
657,185 |
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
8,735 |
|
|
|
10,037 |
|
|
|
26,127 |
|
|
|
26,843 |
|
Interest expense |
|
|
(2,334 |
) |
|
|
(6,128 |
) |
|
|
(16,959 |
) |
|
|
(18,678 |
) |
Gain (loss) on sale of marketable securities, net |
|
|
1,763 |
|
|
|
149 |
|
|
|
1,755 |
|
|
|
(53 |
) |
Other, net |
|
|
2,112 |
|
|
|
2,842 |
|
|
|
2,517 |
|
|
|
6,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
288,247 |
|
|
|
223,047 |
|
|
|
950,970 |
|
|
|
671,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(82,724 |
) |
|
|
(58,597 |
) |
|
|
(269,370 |
) |
|
|
(186,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
205,523 |
|
|
$ |
164,450 |
|
|
$ |
681,600 |
|
|
$ |
485,492 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
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|
Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.48 |
|
|
$ |
1.27 |
|
|
$ |
4.96 |
|
|
$ |
3.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.48 |
|
|
$ |
1.19 |
|
|
$ |
4.93 |
|
|
$ |
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock |
|
|
138,683 |
|
|
|
129,172 |
|
|
|
137,484 |
|
|
|
129,110 |
|
Dilutive potential shares of common stock |
|
|
307 |
|
|
|
9,617 |
|
|
|
1,432 |
|
|
|
9,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
138,990 |
|
|
|
138,789 |
|
|
|
138,916 |
|
|
|
138,774 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of the consolidated financial statements.
4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except number of shares and per share data)
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Accumulated |
|
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|
|
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|
|
|
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Additional |
|
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Other |
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|
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Total |
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury Stock |
|
Stockholders |
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Gain (Loss) |
|
Shares |
|
Amount |
|
Equity |
|
|
|
January 1, 2007, before
adoption of FIN 48 |
|
|
134,133,776 |
|
|
$ |
1,341 |
|
|
$ |
1,299,846 |
|
|
$ |
1,137,151 |
|
|
$ |
(4,417 |
) |
|
|
4,916,800 |
|
|
$ |
(114,413 |
) |
|
$ |
2,319,508 |
|
Cumulative effect of
adopting FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,422 |
) |
|
|
|
January 1, 2007 |
|
|
134,133,776 |
|
|
|
1,341 |
|
|
|
1,299,846 |
|
|
|
1,108,729 |
|
|
|
(4,417 |
) |
|
|
4,916,800 |
|
|
|
(114,413 |
) |
|
|
2,291,086 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681,600 |
|
Dividends to stockholders
($4.375 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(605,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(605,316 |
) |
Conversion of long-term debt |
|
|
9,210,809 |
|
|
|
92 |
|
|
|
453,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453,891 |
|
Reversal of deferred tax
liability related to imputed
interest on converted
debentures |
|
|
|
|
|
|
|
|
|
|
52,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,104 |
|
Stock options exercised |
|
|
287,040 |
|
|
|
3 |
|
|
|
9,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,473 |
|
Stock-based compensation, net |
|
|
|
|
|
|
|
|
|
|
8,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,727 |
|
Gain on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
Pension plan termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
143,631,625 |
|
|
$ |
1,436 |
|
|
$ |
1,823,946 |
|
|
$ |
1,185,013 |
|
|
$ |
97 |
|
|
|
4,916,800 |
|
|
$ |
(114,413 |
) |
|
$ |
2,896,079 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
681,600 |
|
|
$ |
485,492 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
171,605 |
|
|
|
148,858 |
|
(Gain) loss on disposition of assets |
|
|
(5,418 |
) |
|
|
2,191 |
|
(Gain) loss on sale of marketable securities, net |
|
|
(1,755 |
) |
|
|
53 |
|
Deferred tax provision |
|
|
10,583 |
|
|
|
17,017 |
|
Accretion of discounts on marketable securities |
|
|
(9,233 |
) |
|
|
(8,999 |
) |
Amortization/write-off of debt issuance costs |
|
|
9,231 |
|
|
|
648 |
|
Amortization of debt discounts |
|
|
178 |
|
|
|
309 |
|
Stock-based compensation expense |
|
|
3,266 |
|
|
|
2,281 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
(4,280 |
) |
|
|
(1,156 |
) |
Deferred income, net |
|
|
11,897 |
|
|
|
1,590 |
|
Deferred expenses, net |
|
|
(20,229 |
) |
|
|
6,610 |
|
Other items, net |
|
|
3,977 |
|
|
|
(1,143 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
24,905 |
|
|
|
(91,135 |
) |
Rig spare parts and supplies and other current assets |
|
|
(33,939 |
) |
|
|
(12,854 |
) |
Accounts payable and accrued liabilities |
|
|
8,328 |
|
|
|
29,724 |
|
Taxes payable |
|
|
22,777 |
|
|
|
(43,348 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
873,493 |
|
|
|
536,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(451,331 |
) |
|
|
(367,718 |
) |
Proceeds from disposition of assets, net of disposal costs |
|
|
7,658 |
|
|
|
(349 |
) |
Proceeds from sale and maturities of marketable securities |
|
|
2,314,111 |
|
|
|
1,638,092 |
|
Purchases of marketable securities |
|
|
(2,377,377 |
) |
|
|
(1,727,185 |
) |
Proceeds from settlement of forward contracts |
|
|
4,889 |
|
|
|
4,517 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(502,050 |
) |
|
|
(452,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payment of quarterly and special dividends |
|
|
(605,316 |
) |
|
|
(242,006 |
) |
Proceeds from stock options exercised |
|
|
9,522 |
|
|
|
2,944 |
|
Excess tax benefits from stock-based payment arrangements |
|
|
4,280 |
|
|
|
1,156 |
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(591,514 |
) |
|
|
(237,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(220,071 |
) |
|
|
(154,411 |
) |
Cash and cash equivalents, beginning of period |
|
|
524,698 |
|
|
|
842,590 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
304,627 |
|
|
$ |
688,179 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
6
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
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, 2006 (File No.
1-13926).
As of October 25, 2007, Loews Corporation, or Loews, owned 50.5% of the outstanding shares of
our common stock.
Interim Financial Information
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, or SEC. 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 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.
Cash and Cash Equivalents, Marketable Securities
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 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
gains (losses) 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).
Derivative Financial Instruments
Our derivative financial instruments include foreign currency forward exchange contracts and a
contingent interest provision that is embedded in our 1.5% Convertible Senior Debentures Due 2031,
or 1.5% Debentures, issued on April 11, 2001. See Note 4.
Supplementary Cash Flow Information
We paid interest on long-term debt totaling $25.2 million and $29.1 million for the nine
months ended September 30, 2007 and 2006, respectively.
We paid $224.0 million and $199.4 million in U.S. income taxes during the nine months ended
September 30, 2007 and 2006, respectively. We received refunds of $11.4 million in U.S. income
taxes during the nine months ended September 30, 2006. We paid $27.5 million and $5.2 million in
foreign income taxes, net of foreign tax refunds, during the nine months ended September 30, 2007
and 2006, respectively.
We recorded income tax benefits of $5.5 million and $1.6 million related to employee stock
plan exercises during the first nine months of 2007 and 2006, respectively.
7
During the nine months ended September 30, 2007 and 2006, the holders of $450.5 million and
$20,000, respectively, in aggregate principal amount of our 1.5% Debentures elected to convert
their outstanding debentures into shares of our common stock.
During the nine months ended September 30, 2007 and 2006, the holders of $1.5 million and
$12.1 million accreted, or carrying, value through the date of conversion, respectively, of our
Zero Coupon Convertible Debentures due 2020, or Zero Coupon Debentures, elected to convert their
outstanding debentures into shares of our common stock. The aggregate principal amount at maturity
of our Zero Coupon Debentures converted during the nine months ended September 30, 2007 and 2006
was $2.4 million and $19.9 million, respectively.. See Note 7.
Capitalized Interest
We capitalize interest cost for the construction and upgrade of qualifying assets. In April
2005 and July 2006, we began capitalizing interest on expenditures related to the upgrades of the
Ocean Endeavor and the Ocean Monarch, respectively, for ultra-deepwater service. We ceased
capitalizing interest related to the Ocean Endeavor upon completion of the upgrade in March 2007.
In December 2005 and January 2006, we began capitalizing interest on expenditures related to the
construction of our two jack-up rigs, the Ocean Scepter and Ocean Shield, respectively.
A reconciliation of our total interest cost to Interest expense as reported in our
Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Total interest cost including
amortization of debt issuance costs |
|
$ |
6,943 |
|
|
$ |
8,895 |
|
|
$ |
30,083 |
|
|
$ |
25,577 |
|
Capitalized interest |
|
|
(4,609 |
) |
|
|
(2,767 |
) |
|
|
(13,124 |
) |
|
|
(6,899 |
) |
|
|
|
Total interest expense as reported |
|
$ |
2,334 |
|
|
$ |
6,128 |
|
|
$ |
16,959 |
|
|
$ |
18,678 |
|
|
|
|
Debt Issuance Costs
Debt issuance costs are included in our Consolidated Balance Sheets in Prepaid expenses and
other and Other assets, depending on the maturity of the associated debt, and are amortized over
the respective terms of the related debt. Interest expense for the nine months ended September 30,
2007 includes $8.9 million in debt issuance costs that we wrote-off in connection with the
conversions of our 1.5% Debentures and Zero Coupon Debentures into shares of our common stock
during the nine months ended September 30, 2007. See Supplementary Cash Flow Information and
Note 7.
Treasury Stock
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. 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. We did not repurchase any shares of our
outstanding common stock during the nine months ended September 30, 2007 or 2006.
8
Comprehensive Income
A reconciliation of net income to comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Net income |
|
$ |
205,523 |
|
|
$ |
164,450 |
|
|
$ |
681,600 |
|
|
$ |
485,492 |
|
Other comprehensive gains (losses), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension adjustment upon plan termination |
|
|
|
|
|
|
|
|
|
|
4,526 |
|
|
|
|
|
Unrealized holding gain on investments |
|
|
94 |
|
|
|
80 |
|
|
|
179 |
|
|
|
118 |
|
Reclassification adjustment for gain
included in net income |
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
(62 |
) |
|
|
|
Comprehensive income |
|
$ |
205,617 |
|
|
$ |
164,530 |
|
|
$ |
686,114 |
|
|
$ |
485,548 |
|
|
|
|
The tax related to the change in unrealized holding gains on investments was approximately
$50,000 and $43,000 for the quarters ended September 30, 2007 and 2006, respectively.
The tax related to the pension adjustment upon plan termination for the nine months ended
September 30, 2007 was $2.4 million. The tax related to the change in unrealized holding gain on
investments was approximately $96,000 and $64,000 for the nine months ended September 30, 2007 and
2006, respectively. The tax effect on the reclassification adjustment for net gains included in
net income was approximately $103,000 and $33,000 for the nine months ended September 30, 2007 and
2006, respectively.
Currency Translation
Our functional currency is the U.S. dollar. Currency translation adjustments and transaction
gains and losses, including gains and losses from the settlement of foreign currency forward
exchange contracts, are reported as Other income (expense) in our Consolidated Statements of
Operations. For the three and nine months ended September 30, 2007, we recognized net foreign
currency exchange gains of $2.1 million and $2.4 million, respectively. For the three and nine
months ended September 30, 2006, we recognized net foreign currency exchange gains of $3.1 million
and $7.2 million, respectively. See Note 4.
Revenue Recognition
Revenue from our dayrate drilling contracts is recognized as services are performed. In
connection with such drilling contracts, we may receive fees (either lump-sum or dayrate) for the
mobilization of equipment. These fees are earned as services are performed over the initial term
of the related drilling contracts. We defer mobilization fees received, as well as direct and
incremental mobilization costs incurred, and amortize each, on a straight-line basis, over the term
of the related drilling contracts (which is the period estimated to be benefited from the
mobilization activity). Straight-line amortization of mobilization revenues and related costs over
the initial term of the related drilling contracts (which generally range from two to 60 months) is
consistent with the timing of net cash flows generated from the actual drilling services performed.
Absent a contract, mobilization costs are recognized currently.
From time to time, we may receive fees from our customers for capital improvements to our
rigs. We defer such fees 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 asset.
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.
9
Stock-Based Compensation
Our Second Amended and Restated 2000 Stock Option Plan, as amended, or Stock Plan, provides
for the issuance of either incentive stock options or non-qualified stock options to our employees,
consultants and non-employee directors. Our Stock Plan also authorizes the award of stock
appreciation rights, or SARs, in tandem with stock options or separately. Effective January 1,
2006, we adopted the Financial Accounting Standards Board, or FASB, revised Statement of Financial
Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS 123 (R),
which requires that compensation cost related to share-based payment transactions be recognized in
our financial statements. As a result of adopting SFAS 123 (R), Operating income and Income
before income tax for the three and nine months ended September 30, 2007 were reduced by $1.3
million and $3.3 million, respectively. Reductions in Operating income and Income before income
tax, as a consequence of the adoption of SFAS 123 (R), for the three and nine months ended
September 30, 2006 were $0.8 million and $2.3 million, respectively.
During the three months ended September 30, 2007, we began using the Black Scholes model to
value SARs that were granted during the period. We had previously used the Binomial Option pricing
model to value stock options and SARs. The change in valuation technique was necessitated by our
decision to change our stock option administrator. There was no material impact to our
consolidated results of operations, financial position or cash flows as a result of the change in
valuation techniques.
Use of Estimates in the Preparation of Financial Statements
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.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect earnings.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, or SFAS 159, which provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. GAAP has required different measurement
attributes for different assets and liabilities that can create artificial volatility in earnings.
The objective of SFAS 159 is to help mitigate this type of volatility in the earnings by enabling
companies to report related assets and liabilities at fair value, which would likely reduce the
need for companies to comply with complex hedge accounting provisions. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. We have completed our evaluation of the impact of
applying SFAS 159 on our financial statements and have determined that the adoption of SFAS 159
will not have a material impact on our consolidated results of operations, financial position or
cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which
establishes a separate framework for measuring fair value in GAAP, and expands disclosures about
fair value measurements. SFAS 157 was issued to eliminate the diversity in practice that exists
due to the different definitions of fair value and the limited guidance for applying those
definitions in GAAP that are dispersed among the many accounting pronouncements that require fair
value measurements. SFAS 157 does not require any new fair value measurements; however, its
adoption may result in changes to current practice. Changes resulting from the application of SFAS
157 relate to the definition of fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based
measurement, rather than an entity-specific measurement. It also establishes a fair value
hierarchy that distinguishes between (i) market participant assumptions developed based on market
data obtained from independent sources and (ii) the reporting entitys own assumptions about market
participant assumptions developed based on the best information available under the circumstances.
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007, including interim periods within those fiscal years. Earlier application is encouraged,
provided that the reporting entity has not yet issued financial statements for that fiscal year,
including interim periods. We have completed our
10
evaluation of the impact of applying SFAS 157 on our financial statements and have determined that
the adoption of SFAS 157 will not have a material impact on our consolidated results of operations,
financial position or cash flows.
2. Earnings Per Share
A reconciliation of the numerators and the denominators of our basic and diluted per-share
computations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In thousands, except per share data) |
Net income basic (numerator): |
|
$ |
205,523 |
|
|
$ |
164,450 |
|
|
$ |
681,600 |
|
|
$ |
485,492 |
|
Effect of dilutive potential shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% Debentures |
|
|
8 |
|
|
|
778 |
|
|
|
3,388 |
|
|
|
2,532 |
|
Zero Coupon Debentures |
|
|
6 |
|
|
|
27 |
|
|
|
45 |
|
|
|
203 |
|
|
|
|
Net income including conversions
diluted (numerator) |
|
$ |
205,537 |
|
|
$ |
165,255 |
|
|
$ |
685,033 |
|
|
$ |
488,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic (denominator): |
|
|
138,683 |
|
|
|
129,172 |
|
|
|
137,484 |
|
|
|
129,110 |
|
Effect of dilutive potential shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5% Debentures |
|
|
194 |
|
|
|
9,383 |
|
|
|
1,320 |
|
|
|
9,383 |
|
Zero Coupon Debentures |
|
|
52 |
|
|
|
94 |
|
|
|
55 |
|
|
|
128 |
|
Stock options and SARs |
|
|
61 |
|
|
|
140 |
|
|
|
57 |
|
|
|
153 |
|
|
|
|
Weighted average shares including conversions
diluted (denominator) |
|
|
138,990 |
|
|
|
138,789 |
|
|
|
138,916 |
|
|
|
138,774 |
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.48 |
|
|
$ |
1.27 |
|
|
$ |
4.96 |
|
|
$ |
3.76 |
|
|
|
|
Diluted |
|
$ |
1.48 |
|
|
$ |
1.19 |
|
|
$ |
4.93 |
|
|
$ |
3.52 |
|
|
|
|
Our computations of diluted earnings per share, or EPS, for the three months ended September
30, 2007 exclude 172,494 SARs. Our computations of diluted EPS for the nine months ended September
30, 2007 exclude stock options representing 30,666 shares of common stock and 171,878 SARs. The
inclusion of such potentially dilutive shares in the computations of diluted EPS would have been
antidilutive for the periods presented.
Our computations of diluted EPS for the three months ended September 30, 2006 exclude stock
options representing 79,708 shares of common stock and 78,750 SARs. Our computations of diluted
EPS for the nine months ended September 30, 2006 exclude stock options representing 67,606 shares
of common stock and 35,769 SARs. The inclusion of such potentially dilutive shares in the
computations of diluted EPS would have been antidilutive for the periods presented.
11
3. Marketable Securities
We report our investments as current assets in our Consolidated Balance Sheets in Marketable
securities, representing the investment of cash available for current operations.
Our investments in marketable securities are classified as available for sale and are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
Amortized |
|
Unrealized |
|
Market |
|
|
Cost |
|
Gain (Loss) |
|
Value |
|
|
(In thousands) |
Debt securities issued by the U.S. Treasury
and other U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
373,819 |
|
|
$ |
139 |
|
|
$ |
373,958 |
|
Mortgage-backed securities |
|
|
1,426 |
|
|
|
10 |
|
|
|
1,436 |
|
|
|
|
Total |
|
$ |
375,245 |
|
|
$ |
149 |
|
|
$ |
375,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
Amortized |
|
Unrealized |
|
Market |
|
|
Cost |
|
Gain (Loss) |
|
Value |
|
|
(In thousands) |
Debt securities issued by the U.S. Treasury
and other U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
299,252 |
|
|
$ |
170 |
|
|
$ |
299,422 |
|
Mortgage-backed securities |
|
|
1,740 |
|
|
|
(3 |
) |
|
|
1,737 |
|
|
|
|
Total |
|
$ |
300,992 |
|
|
$ |
167 |
|
|
$ |
301,159 |
|
|
|
|
Proceeds from sales and maturities of marketable securities and gross realized gains and
losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In thousands) |
Proceeds from sales |
|
$ |
992,392 |
|
|
$ |
296,303 |
|
|
$ |
1,689,111 |
|
|
$ |
888,092 |
|
Proceeds from maturities |
|
|
175,000 |
|
|
|
400,000 |
|
|
|
625,000 |
|
|
|
750,000 |
|
Gross realized gains |
|
|
1,768 |
|
|
|
157 |
|
|
|
1,810 |
|
|
|
162 |
|
Gross realized losses |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
(55 |
) |
|
|
(215 |
) |
4. Derivative Financial Instruments
Foreign Currency Forward Exchange Contracts
Our international operations expose us to foreign exchange risk, primarily associated with our
costs payable in foreign currencies, primarily for employee compensation and purchases from foreign
suppliers. We utilize foreign exchange forward contracts to reduce our forward exchange risk. A
foreign currency forward exchange contract obligates a contract holder to exchange predetermined
amounts of specified foreign currencies at specified foreign exchange rates on specified dates.
During the three and nine months ended September 30, 2007, we settled several of our
obligations under various foreign currency forward exchange contracts, which resulted in net
realized gains totaling $1.4 million and $4.9 million, respectively. We realized net gains
totaling $2.5 million and $4.5 million during the three and nine months ended September 30, 2006,
respectively, upon settlement of foreign currency forward exchange contracts during the periods.
As of September 30, 2007, we had foreign currency forward exchange contracts outstanding, which
aggregated $36.6 million, that require us to purchase the equivalent of $11.0 million in Australian
dollars, $8.7 million in Brazilian reais, $5.0 million in British pounds sterling, $6.3 million in
Mexican pesos and $5.6 million in Norwegian kroner at various times through January 2008.
12
These forward contracts are derivatives as defined by SFAS No. 133, Accounting for
Derivatives and Hedging Activities, or SFAS 133. SFAS 133 requires that each derivative be 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 hedge accounting, the gains and losses are
reflected in income in the same period as offsetting losses and gains on the qualifying hedged
positions. The forward contracts that we entered into in 2005 through 2007 did not qualify for
hedge accounting. In accordance with SFAS 133, we recorded net pre-tax unrealized gains of $0.6
million and $2.6 million in our Consolidated Statements of Operations for the three and nine months
ended September 30, 2007, respectively, as Other income (expense) to adjust the carrying value of
these derivative financial instruments to their fair value. We recorded net pre-tax unrealized
gains of $1.0 million and $3.6 million for the three and nine months ended September 30, 2006,
respectively, as Other income (expense) to adjust the carrying value of these derivative
financial instruments to their fair value at September 30, 2006. We have presented the $2.6
million fair value of these foreign currency forward exchange contracts at both September 30, 2007
and December 31, 2006 as Prepaid expenses and other in our Consolidated Balance Sheets.
Contingent Interest
Our 1.5% Debentures, of which $9.4 million aggregate principal amount were outstanding as of
September 30, 2007, contain a contingent interest provision. The contingent interest component is
an embedded derivative as defined by SFAS 133 and accordingly must be split from the host
instrument and recorded at fair value on the balance sheet. The contingent interest component had
no value at issuance, at December 31, 2006 or at September 30, 2007.
5. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Drilling rigs and equipment |
|
$ |
4,379,526 |
|
|
$ |
3,896,585 |
|
Construction work-in-progress |
|
|
381,098 |
|
|
|
459,824 |
|
Land and buildings |
|
|
18,936 |
|
|
|
17,353 |
|
Office equipment and other |
|
|
29,483 |
|
|
|
27,132 |
|
|
|
|
Cost |
|
|
4,809,043 |
|
|
|
4,400,894 |
|
Less: accumulated depreciation |
|
|
(1,944,046 |
) |
|
|
(1,772,441 |
) |
|
|
|
Drilling and other property and equipment, net |
|
$ |
2,864,997 |
|
|
$ |
2,628,453 |
|
|
|
|
Construction work-in-progress at September 30, 2007 consisted of $139.5 million related to the
major upgrade of the Ocean Monarch to ultra-deepwater service and $241.6 million related to the
construction of two new jack-up drilling units, the Ocean Scepter and the Ocean Shield. We
anticipate delivery of the Ocean Shield and Ocean Scepter late in the first quarter of 2008 and
during the second quarter of 2008, respectively. We expect the upgrade of the Ocean Monarch to be
completed in late 2008.
The Ocean Endeavor arrived in the U.S. Gulf of Mexico late in the second quarter of 2007 and
commenced drilling operations in early July 2007. Consequently, we transferred $249.6 million in
construction work-in-progress to drilling rigs and equipment in the second quarter of 2007.
13
6. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Payroll and benefits |
|
$ |
55,234 |
|
|
$ |
42,496 |
|
Accrued project/upgrade costs |
|
|
53,713 |
|
|
|
67,308 |
|
Deferred revenue |
|
|
20,170 |
|
|
|
13,887 |
|
Personal injury and other claims |
|
|
8,547 |
|
|
|
9,934 |
|
Interest payable |
|
|
4,204 |
|
|
|
11,823 |
|
Hurricane related expenses and deferred gains |
|
|
1,380 |
|
|
|
8,328 |
|
Other |
|
|
24,867 |
|
|
|
31,202 |
|
|
|
|
Total |
|
$ |
168,115 |
|
|
$ |
184,978 |
|
|
|
|
7. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Zero Coupon Debentures (due 2020) |
|
$ |
3,897 |
|
|
$ |
5,302 |
|
1.5% Debentures (due 2031) |
|
|
9,420 |
|
|
|
459,967 |
|
5.15% Senior Notes (due 2014) |
|
|
249,552 |
|
|
|
249,513 |
|
4.875% Senior Notes (due 2015) |
|
|
249,562 |
|
|
|
249,528 |
|
|
|
|
|
|
|
512,431 |
|
|
|
964,310 |
|
Less: Current maturities |
|
|
9,420 |
|
|
|
|
|
|
|
|
Total |
|
$ |
503,011 |
|
|
$ |
964,310 |
|
|
|
|
Certain of our long-term debt payments may be accelerated due to certain rights that the
holders of our debt securities have to put the securities to us. The holders of our outstanding
1.5% Debentures have the right to require us to purchase all or a portion of their outstanding
debentures on April 15, 2008 at a price equal to 100% of the principal amount of the debentures to
be repurchased plus accrued and unpaid interest to such date. In addition, the holders of our Zero
Coupon Debentures have the right to require us to purchase all or a portion of their outstanding
debentures on June 6, 2010 at a price equal to $706.82 per $1,000 principal amount at maturity of
the debentures.
The aggregate maturities of long-term debt for each of the five years subsequent to September
30, 2007 are as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
2007 |
|
$ |
|
|
2008 |
|
|
9,420 |
|
2009 |
|
|
|
|
2010 |
|
|
3,897 |
|
2011 |
|
|
|
|
Thereafter |
|
|
499,114 |
|
|
|
|
|
512,431 |
|
Less: Current maturities |
|
|
9,420 |
|
|
Total |
|
$ |
503,011 |
|
|
Debt Conversions. During the first nine months of 2007, the holders of $450.5 million in
aggregate principal amount of our 1.5% Debentures and the holders of $1.5 million accreted, or
carrying, value through the date of conversion of our Zero Coupon Debentures elected to convert
their outstanding debentures into shares of our common stock. We issued 9,210,809 shares of our
common stock pursuant to these conversions during the first nine
14
months of 2007. The aggregate principal amount at maturity of our Zero Coupon Debentures converted
during the nine months ended September 30, 2007 was $2.4 million.
At September 30, 2007, there was $6.0 million aggregate principal amount at maturity ($3.9
million accreted, or carrying, value) of our Zero Coupon Debentures outstanding.
As a result of the conversions of our 1.5% Debentures, we reversed a $52.1 million non-current
deferred tax liability during the first nine months of 2007 related to interest expense imputed on
these debentures for U.S. federal income tax return purposes. See Note 10.
8. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims
by offshore workers alleging personal injuries. In accordance with SFAS No. 5, Accounting for
Contingencies, or SFAS 5, we have assessed each claim or exposure to determine the likelihood that
the resolution of the matter might ultimately result in an adverse effect on our financial
condition, results of operations or cash flows. When we determine that an unfavorable resolution of
a matter is probable and such amount of loss can be determined, we record a reserve for the
estimated loss at the time that both of these criteria are met. Our management believes that we
have established adequate reserves for any liabilities that may reasonably be expected to result
from these claims.
Litigation. We are a defendant in a lawsuit filed in January 2005 in the U.S. District Court
for the Eastern District of Louisiana on behalf of Total E&P USA, Inc. and several oil companies
alleging that our semisubmersible rig, the Ocean America, damaged a natural gas pipeline in the
Gulf of Mexico during Hurricane Ivan in 2004. The plaintiffs seek damages from us including, but
not limited to, loss of revenue, that are currently estimated to be in excess of $100 million,
together with interest, attorneys fees and costs. We deny any liability for plaintiffs alleged
loss and do not believe that ultimate liability, if any, resulting from this litigation will have a
material adverse effect on our financial condition, results of operations or cash flows. In
addition, we have given notice of the claim to our insurance underwriters. Our deductible for this
type of claim is $2.0 million.
We are one of several unrelated defendants in a lawsuit filed in the Circuit Courts of the
State of Mississippi 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. We expect to receive complete defense and indemnity from Murphy
Exploration & Production Company pursuant to the terms of our 1992 asset purchase agreement with
them. 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
adverse effect on our financial condition, results of operations or 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 or cash flows.
Other. Our operations in Brazil have exposed us to various claims and assessments related to
our personnel, customs duties and municipal taxes, among other things, that have arisen in the
ordinary course of business. During the second quarter of 2007, we reviewed our estimated reserve
for personnel taxes in Brazil based on current facts and circumstances and adjusted our estimated
reserve in accordance with SFAS 5. Accordingly, we recorded a $6.5 million reduction in Contract
drilling expense in our Consolidated Statements of Operations in the second quarter of 2007 as a
result of our change in estimate. At September 30, 2007, our reserves related to our Brazilian
operations aggregated $8.4 million, of which $2.0 million and $6.4 million were recorded in
Accrued liabilities and Other liabilities, respectively, in our Consolidated Balance Sheets.
Reserves related to our Brazilian operations totaled $14.2 million at December 31, 2006, of which
$0.5 million was recorded in Accrued liabilities and $13.7 million was recorded in Other
liabilities in our Consolidated Balance Sheets.
Personal Injury Claims. Our deductible for liability coverage for personal injury claims,
which primarily results from Jones Act liability in the Gulf of Mexico, is $5.0 million per
occurrence, with no aggregate deductible. We engage experts to assist us in estimating our
aggregate reserve for personal injury claims based on our historical losses and utilizing various
actuarial models. At September 30, 2007, our estimated liability for personal injury claims was
$36.4 million, of which $8.6 million and $27.8 million were recorded in Accrued liabilities and
Other liabilities, respectively, in our Consolidated Balance Sheets. At December 31, 2006, we
had recorded loss reserves for personal injury claims aggregating $35.0 million, of which $9.9
million and $25.1 million were recorded in
15
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:
|
|
|
the severity of personal injuries claimed; |
|
|
|
|
significant changes in the volume of personal injury claims; |
|
|
|
|
the unpredictability of legal jurisdictions where the claims will ultimately be
litigated; |
|
|
|
|
inconsistent court decisions; and |
|
|
|
|
the risks and lack of predictability inherent in personal injury litigation. |
Purchase Obligations. As of September 30, 2007, we had purchase obligations aggregating
approximately $243 million related to the major upgrade of the Ocean Monarch and construction of
two new jack-up rigs, the Ocean Scepter and Ocean Shield. We anticipate that expenditures related
to these shipyard projects will be approximately $50 million and $193 million for the remainder of
2007 and in 2008, respectively. However, the actual timing of these expenditures will vary based
on the completion of various construction milestones and the timing of the delivery of equipment,
which are beyond our control.
We had no other purchase obligations for major rig upgrades or any other significant purchase
obligations at September 30, 2007, except for those related to our direct rig operations, which
arise during the normal course of business.
9. Segments and Geographic Area Analysis
We manage our business on the basis of one reportable segment, contract drilling of offshore
oil and gas wells. Although we provide contract drilling services from 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 among
all divisions and locations, including the nature of services provided and the type of customers
for such services.
Revenues from contract drilling services by equipment-type are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In thousands) |
High-Specification Floaters |
|
$ |
258,679 |
|
|
$ |
191,786 |
|
|
$ |
769,087 |
|
|
$ |
545,702 |
|
Intermediate Semisubmersibles |
|
|
255,795 |
|
|
|
189,521 |
|
|
|
725,753 |
|
|
|
562,324 |
|
Jack-ups |
|
|
113,772 |
|
|
|
117,146 |
|
|
|
359,245 |
|
|
|
323,470 |
|
|
|
|
Total contract drilling revenues |
|
|
628,246 |
|
|
|
498,453 |
|
|
|
1,854,085 |
|
|
|
1,431,496 |
|
Revenues related to reimbursable
expenses |
|
|
15,716 |
|
|
|
16,003 |
|
|
|
46,936 |
|
|
|
42,878 |
|
|
|
|
Total revenues |
|
$ |
643,962 |
|
|
$ |
514,456 |
|
|
$ |
1,901,021 |
|
|
$ |
1,474,374 |
|
|
|
|
16
Geographic Areas
At September 30, 2007, our drilling rigs were located offshore twelve countries in addition to
the United States. As a result, we are exposed to the risk of changes in social, political and
economic conditions inherent in foreign operations and our results of operations and the value of
our foreign assets are affected by fluctuations in foreign currency exchange rates. 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, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In thousands) |
United States |
|
$ |
315,626 |
|
|
$ |
293,094 |
|
|
$ |
1,004,376 |
|
|
$ |
838,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Africa/Mediterranean |
|
|
126,741 |
|
|
|
61,206 |
|
|
|
346,485 |
|
|
|
176,334 |
|
Australia/Asia/Middle East |
|
|
110,610 |
|
|
|
92,280 |
|
|
|
292,352 |
|
|
|
246,498 |
|
South America |
|
|
61,174 |
|
|
|
48,869 |
|
|
|
165,912 |
|
|
|
151,010 |
|
Mexico |
|
|
29,811 |
|
|
|
19,007 |
|
|
|
91,896 |
|
|
|
62,352 |
|
|
|
|
Total revenues |
|
$ |
643,962 |
|
|
$ |
514,456 |
|
|
$ |
1,901,021 |
|
|
$ |
1,474,374 |
|
|
|
|
10. Income Taxes
Our net income tax expense or benefit is a function of the mix between our domestic and
international pre-tax earnings or losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Certain of our international rigs are owned or operated,
directly or indirectly, by Diamond Offshore International Limited, a Cayman Islands company which
is one of our wholly owned subsidiaries. Earnings from this subsidiary are reinvested
internationally and remittance to the U.S. is indefinitely postponed. Consequently, no U.S. tax
expense or benefits were recognized on these earnings or losses in 2007 or 2006.
We recognized income tax expense of $82.7 million on pre-tax income of $288.2 million during
the three months ended September 30, 2007 compared to income tax expense of $58.6 million on
pre-tax income of $223.0 million for the three months ended September 30, 2006. Our estimated
annual effective tax rate was 27.9% as of September 30, 2007 and 28.1% as of September 30, 2006.
Income tax expense for the three months ended September 30, 2007 also included expense of $4.4
million related to 2006 return to provision adjustments.
We recognized income tax expense of $269.4 million on pre-tax income of $951.0 million during
the nine months ended September 30, 2007 compared to income tax expense of $186.4 million on
pre-tax income of $671.9 million for the same period in 2006. Income tax expense for the nine
months ended September 30, 2007 also included expense of $4.4 million related to 2006 return to
provision adjustments. Income tax expense for the nine months ended September 30, 2006 was reduced
by 2005 return to provision adjustments of $2.2 million.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, or FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, we recognized
a long-term tax receivable of $2.6 million and a long-term tax liability of $31.1 million for
uncertain tax positions, the net of which was accounted for as a reduction to the January 1, 2007
balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term |
|
|
|
|
|
|
Net Liability |
|
|
|
Tax |
|
|
Long term Tax |
|
|
for Uncertain Tax |
|
|
|
Receivable |
|
|
Payable |
|
|
Positions |
|
|
|
(In thousands) |
|
Balance at January 1, 2007 |
|
$ |
2,642 |
|
|
$ |
(31,064 |
) |
|
$ |
(28,422 |
) |
Additions based on tax
positions related to the
current year |
|
|
373 |
|
|
|
(4,181 |
) |
|
|
(3,808 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
$ |
3,015 |
|
|
$ |
(35,245 |
) |
|
$ |
(32,230 |
) |
|
|
|
|
|
|
|
|
|
|
17
At September 30, 2007 all $32.2 million of the net unrecognized tax benefits would affect the
effective tax rate if recognized.
We record interest related to accrued unrecognized tax benefits in interest expense and
recognize penalties associated with uncertain tax positions in our tax expense. During the three
and nine months ended September 30, 2007, we recognized $0.2 million and $1.1 million of interest
expense related to uncertain tax positions, respectively. Penalty related tax expense for
uncertain tax positions during the three and nine months ended September 30, 2007 was $0.2 million
and $0.4 million, respectively. At September 30, 2007, we had $13.3 million accrued for the
payment of interest and penalties in our Consolidated Balance Sheets.
In several of the international locations in which we operate, certain of our wholly owned
subsidiaries enter into agreements with other of our wholly owned subsidiaries to provide
specialized services and equipment in support of our foreign operations. We apply a transfer
pricing methodology to determine the amount to be charged for providing the services and equipment.
In most cases, there are alternative transfer pricing methodologies that could be applied to these
transactions and, if applied, could result in different chargeable amounts. Taxing authorities in
the various foreign locations in which we operate could apply one of the alternative transfer
pricing methodologies that could result in an increase to our income tax liabilities with respect
to tax returns that remain subject to examination.
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 2000 to 2006. We are currently under audit in several of these jurisdictions
including an audit by the Internal Revenue Service of years 2004 and 2005.
The Brazilian tax authorities are auditing our income tax returns for the periods 2000 to
2005. We have received an initial audit report for tax year 2000 disallowing various deductions
claimed in the tax return. The tax auditors have issued an assessment for tax year 2000 of
approximately $1.5 million, including interest and penalty. We have appealed the tax assessment
and are awaiting the outcome of the appeal. We do not anticipate that any adjustments resulting
from the tax audit will have a material impact on our consolidated results of operations, financial
position or cash flows.
During the nine months ended September 30, 2007, the holders of certain of our debentures
elected to convert them into shares of our common stock. (See Note 7.) As a result of the
conversions of our 1.5% Debentures, we reversed a non-current deferred tax liability of $52.1
million which was accounted for as an increase to Additional paid-in capital. The reversal
related to interest expense imputed on these debentures for U.S. federal income tax return
purposes.
18
11. Pension Plan
The defined benefit pension plan established by Arethusa (Off-Shore) Limited, or Arethusa,
effective October 1, 1992 was frozen on April 30, 1996. At that date all participants were deemed
fully vested in the plan, which covered substantially all U.S. citizens and U.S. permanent
residents who were employed by Arethusa.
We obtained Pension Benefit Guarantee Corporation approval to terminate the plan in the second
quarter of 2007 and have entered into an irrevocable contract with an insurance company to transfer
the responsibility for making payments of plan benefits to the insurance company. Thus, we no
longer have any liability for benefits to participants under the plan. As a result of terminating
the plan, we recorded a one-time settlement expense of approximately $4 million during the nine
months ended September 30, 2007 in Contract drilling expense in our Consolidated Statements of
Operations.
Components of net periodic benefit costs recorded during the periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(In thousands) |
Interest cost |
|
$ |
|
|
|
$ |
263 |
|
|
$ |
692 |
|
|
$ |
789 |
|
Expected return on plan assets |
|
|
|
|
|
|
(340 |
) |
|
|
(625 |
) |
|
|
(1,020 |
) |
Amortization of unrecognized loss |
|
|
|
|
|
|
76 |
|
|
|
171 |
|
|
|
228 |
|
|
|
|
Net periodic pension expense |
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
238 |
|
|
$ |
(3 |
) |
|
|
|
19
ITEM 2. Managements 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, Managements 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, 2006 and Item 1A, Risk Factors
included in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007.
References to Diamond Offshore, we, us or our mean Diamond Offshore Drilling, Inc., a
Delaware corporation, and its subsidiaries.
We are a leader in deep water drilling with a fleet of 44 offshore drilling rigs. Our fleet
currently consists of 30 semisubmersibles, 13 jack-ups and one drillship. In addition, we have two
jack-up drilling units on order at shipyards in Brownsville, Texas (Ocean Scepter) and Singapore
(Ocean Shield). We expect delivery of the Ocean Shield and the Ocean Scepter during the first and
second quarters of 2008, respectively.
Overview
Industry Conditions
Worldwide demand for our mid-water (intermediate) and deepwater (high-specification)
semisubmersible rigs remained strong during the third quarter of 2007. The jack-up market in the
U.S. Gulf of Mexico, or GOM, however, continues to experience reduced demand, resulting in downward
pricing pressure and some of our rigs being ready-stacked for a period of time between wells.
Exclusive of the GOM jack-up market, which accounted for nine percent of our total revenue for the
quarter ended September 30, 2007, solid fundamental market conditions remain in place for all
classes of our offshore drilling rigs worldwide.
Gulf of Mexico. The Ocean Worker completed its contract with PEMEX Exploración Y Producción,
or PEMEX, during the third quarter of 2007 and returned to the GOM for a five-year survey and
preparation for six-month term work in Trinidad that is expected to begin in the fourth quarter of
2007. In addition, the Ocean New Era and the Ocean Voyager underwent five-year surveys and
preparation for 2-1/2 year contracts in Mexico ending in early 2010. The Ocean New Era began
operating in the Mexican sector of the Gulf of Mexico, or Mexican GOM, in late October 2007, and
the Ocean Voyager is expected to commence drilling operations for PEMEX during the fourth quarter
of 2007. The terms of the drilling contracts in Mexico with PEMEX expose us to greater risks than
we normally assume, such as exposure to increased environmental liability and potential early
termination.
In the GOM, the market for our high-specification semisubmersible equipment remains firm. One
of our high-specification rigs is contracted for work in the GOM until the beginning of the second
quarter of 2008, while the remaining seven rigs currently located in the GOM have contracts that
extend into late 2008 and beyond, including one at a dayrate as high as $500,000 for future work.
In many cases, these contracts also include unpriced option periods that have not yet been
exercised or expired.
The dayrates for our four intermediate semisubmersibles currently located in the GOM have
reached as high as $300,000 for a six-month contract beginning in the fourth quarter of 2007;
however strong international demand offering significant term length has led us to contract three
of these units for future work outside the GOM. As a result, we continue to view the deepwater and
intermediate markets in the GOM as under-supplied and believe that the GOM semisubmersible market
will remain strong during the remainder of 2007.
Our jack-up fleet in the GOM continued to experience lower utilization during the third
quarter of 2007, compared to the second quarter of 2007, as three of our rigs were ready-stacked
for a period of time during the third quarter of 2007, and dayrates declined slightly from those
earned during the previous quarter. As of October 25, 2007, four of our eight jack-ups in the GOM
were on contract. The international market for jack-ups remains strong, however, and as a result
we mobilized the Ocean King to offshore Croatia during the third quarter of 2007 (see
Australia/Asia/Middle East/Mediterranean). In addition, the Ocean Columbia received an
approximately 18-month contract with PEMEX in the Mexican GOM for work that is expected to commence
in the fourth quarter of 2007. The Ocean Columbia is currently in a shipyard in the GOM undergoing
contract preparation activities. We believe that the current market environment for jack-up rigs
in the GOM will persist at least through the fourth quarter of 2007.
Brazil. Two of our rigs currently operating offshore Brazil are working under term contracts
that expire in 2009, and two additional rigs are operating under contracts expiring in 2010. The
Ocean Whittington began work in
20
Brazil during the third quarter of 2007 under a contract expiring in 2012. Petróleo
Brasileiro S.A., or Petrobras, is continuing to seek additional intermediate semisubmersible rigs.
The Ocean Concord and the Ocean Yorktown are expected to begin work late in the fourth quarter of
2007 and in the second quarter of 2008, respectively. Under its contract the Ocean Concord can
earn a variable performance bonus in addition to the dayrate for a maximum daily compensation in
the mid-$250,000 range, excluding a lump-sum mobilization fee. The Ocean Yorktown can earn a
variable performance bonus in addition to the dayrate for a maximum daily compensation in the high
$260,000 range, excluding a lump-sum mobilization fee. However, we can provide no assurance that
the maximum compensation specified in these contracts will actually be achieved. We expect the
Brazilian semisubmersible market to remain strong during the remainder of 2007.
North Sea. Effective industry utilization remains at 100 percent in the North Sea where we
have three semisubmersible rigs in the United Kingdom, or U.K., and one semisubmersible unit in
Norway. Indicating the strength of this market, one of our four rigs in the North Sea is working
under contract until the second quarter of 2009, and the other three rigs have term contracts that
extend into 2010.
Australia/Asia/Middle East/Mediterranean. We currently have five semisubmersible rigs and one
jack-up unit operating in the Australia/Asia market, and three jack-up rigs and one semisubmersible
rig located in the Middle East/Mediterranean sector. The Ocean Rover has a two-year commitment at
a dayrate in the low $450,000 range that will keep the high-specification floater in Malaysia for
two additional years commencing in the first quarter of 2009. In the Australia market, the Ocean
Patriot and the Ocean Epoch are committed to work offshore Australia until 2010. The Ocean Patriot
has a two-year contract, plus an option, for work expected to begin in the fourth quarter of 2008
at a dayrate in a range between $380,000 and $420,000. Contract drilling backlog for the Ocean
Epoch includes a one-year contract for work expected to begin in the first quarter of 2008 at a
dayrate in a range between $330,000 and $365,000 and an 18-month contract, plus an option, for work
beginning in early 2009 at a dayrate in the low $350,000 range. In the jack-up market, the Ocean
King has been awarded a contract for a two-year bareboat charter in Croatia. Under the agreement,
the rig will earn a dayrate in the high $100,000 range for work expected to commence in the fourth
quarter of 2007. We believe that the Australia/Asia/Middle East and Mediterranean markets will
remain strong during the remainder of 2007.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of October 25, 2007 and July 26,
2007 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
and reflects both firm commitments (typically represented by signed contracts), as well as letters
of intent, or LOIs. An LOI is subject to customary conditions, including the execution of a
definitive agreement. Contract drilling backlog is calculated by multiplying the contracted
operating dayrate by the firm contract period and adding one-half of any potential rig performance
bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract
period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned
and the actual periods during which revenues are earned will be different than the amounts and
periods shown in the tables below due to various factors. Utilization rates, which generally
approach 95-98% during contracted periods, can be adversely impacted by downtime due to various
operating factors including, but not limited to, weather conditions and unscheduled repairs and
maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization,
contract preparation and customer reimbursables. Changes in our contract drilling backlog between
periods is a function of both the performance of work on term contracts, as well as the extension
or modification of existing term contracts and the execution of additional contracts.
|
|
|
|
|
|
|
|
|
|
|
October 25, 2007 |
|
|
July 26, 2007 |
|
|
|
(In thousands) |
|
Contract Drilling Backlog |
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
3,657,000 |
|
|
$ |
3,888,000 |
|
Intermediate Semisubmersibles |
|
|
4,450,000 |
|
|
|
4,712,000 |
|
Jack-ups |
|
|
432,000 |
|
|
|
452,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
8,539,000 |
|
|
$ |
9,052,000 |
|
|
|
|
|
|
|
|
21
The following table reflects the amount of our contract drilling backlog by year based on our firm
commitments as of October 25, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
Total |
|
|
2007(1) |
|
|
2008 |
|
|
2009 |
|
|
2010 - 2013 |
|
|
|
(In thousands) |
|
Contract Drilling Backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
3,657,000 |
|
|
$ |
250,000 |
|
|
$ |
1,164,000 |
|
|
$ |
950,000 |
|
|
$ |
1,293,000 |
|
Intermediate Semisubmersibles |
|
|
4,450,000 |
|
|
|
326,000 |
|
|
|
1,586,000 |
|
|
|
1,368,000 |
|
|
|
1,170,000 |
|
Jack-ups |
|
|
432,000 |
|
|
|
82,000 |
|
|
|
266,000 |
|
|
|
84,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,539,000 |
|
|
$ |
658,000 |
|
|
$ |
3,016,000 |
|
|
$ |
2,402,000 |
|
|
$ |
2,463,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a three-month period beginning October 1, 2007. |
The following table reflects the percentage of rig days committed by year as of October 25,
2007. The percentage of rig days committed is calculated as the ratio of total days committed
under contracts and LOIs, 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 delivery dates
for the Ocean Monarch and our two newbuild jack-up rigs, the Ocean Scepter and Ocean Shield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31, |
|
|
2007(1) |
|
2008 |
|
2009 |
|
2010 - 2013 |
Rig Days Committed (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
|
100 |
% |
|
|
94 |
% |
|
|
63 |
% |
|
|
19 |
% |
Intermediate Semisubmersibles
|
|
|
100 |
% |
|
|
85 |
% |
|
|
70 |
% |
|
|
16 |
% |
Jack-ups |
|
|
73 |
% |
|
|
32 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
(1) |
|
Represents a three-month period beginning October 1, 2007. |
|
(2) |
|
Includes approximately 696, 449 and 101 scheduled shipyard, survey and mobilization
days for 2007, 2008 and 2009, respectively. |
General
Our revenues vary based on the number of days our fleet is utilized and the dayrates earned.
Utlization and dayrates earned are a function of global and regional balance between supply of rigs
and demand. When a rig is idle, no dayrate is earned and revenues will decrease as a result.
Revenues can also be affected as a result of the acquisition or disposal of rigs, required surveys
and shipyard upgrades. In order to improve utilization or realize higher dayrates, we may mobilize
our rigs from one market to another. However, during periods of mobilization, revenues may be
adversely affected. As a response to changes in the balance of supply and demand, we may withdraw
a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease
or increase revenues, respectively.
As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply
of available rigs, and vice versa. Demand for drilling services is dependent upon the level of
expenditures set by oil and gas companies for offshore exploration and development, as well as a
variety of political and economic factors. The availability of rigs in a particular geographical
region also affects both dayrates and utilization rates. These factors are not within our control
and are difficult to predict.
We recognize revenue from dayrate drilling contracts as services are performed. In connection
with such drilling contracts, we may receive fees (either lump-sum or dayrate) for the mobilization
of equipment. We earn these fees as services are performed over the initial term of the related
drilling contracts. We defer mobilization fees received, as well as direct and incremental
mobilization costs incurred, and amortize each, on a straight-line basis, over the term of the
related drilling contracts (which is the period estimated to be benefited from the mobilization
activity). Straight-line amortization of mobilization revenues and related costs over the term of
the related drilling contracts (which generally range from two to 60 months) is consistent with the
timing of net cash flows generated from the actual drilling services performed. Absent a contract,
mobilization costs are recognized currently.
From time to time, we may receive fees from our customers for capital improvements to our
rigs. We defer such fees and recognize them into income on a straight-line basis over the period
of the related drilling contract as a component of contract drilling revenue. We capitalize the
costs of such capital improvements and depreciate them over the estimated useful life of the
improvement.
22
We receive reimbursements for the purchase of supplies, equipment, personnel services and
other services provided at the request of our customers in accordance with a contract or agreement.
We record these reimbursements at the gross amount billed to the customer, as Revenues related to
reimbursable expenses in our Consolidated Statements of Operations included in Item 1 of Part I of
this report.
Operating Income. Our operating income is primarily affected by revenue factors, but is also
a function of varying levels of operating expenses. Our operating expenses represent all direct
and indirect costs associated with the operation and maintenance of our drilling equipment. The
principal components of our operating costs are, among other things, direct and indirect costs of
labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter
rentals and insurance. Labor and repair and maintenance costs represent the most significant
components of our operating expenses. In general, our labor costs increase primarily due to higher
salary levels, rig staffing requirements, and costs associated with labor regulations in the
geographic regions in which our rigs operate. We have experienced and continue to experience
upward pressure on salaries and wages as a result of the strengthening offshore drilling market and
increased competition for skilled workers. In response to these market conditions we have
implemented retention programs, including increases in compensation.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the
drilling unit is performing, as well as the age and condition of the equipment and the regions in
which our rigs are working..
Operating expenses generally are not affected by changes in dayrates, and short-term
reductions in utilization do not necessarily result in lower operating expenses. For instance, if
a rig is to be idle for a short period of time, few decreases in operating expenses may actually
occur since the rig is typically maintained in a prepared or ready-stacked state with a full
crew. In addition, when a rig is idle, we are responsible for certain operating expenses such as
rig fuel and supply boat costs, which are typically costs of the operator when a rig is under
contract. However, if the rig is to be idle for an extended period of time, we may reduce the size
of a rigs crew and take steps to cold stack the rig, which lowers expenses and partially offsets
the impact on operating income. We recognize, as incurred, operating expenses related to
activities such as inspections, painting projects and routine overhauls that meet certain criteria
and which maintain rather than upgrade our rigs. These expenses vary from period to period. Costs
of rig enhancements are capitalized and depreciated over the expected useful lives of the
enhancements. Higher depreciation expense decreases operating income in periods subsequent to
capital upgrades.
Periods of high, sustained utilization may result in cost increases for maintenance and
repairs in order to maintain our equipment in proper, working order. In addition, during periods
of high activity and dayrates, higher prices generally pervade the entire offshore drilling
industry and its support businesses, which cause our costs for goods and services to increase.
Our operating income is negatively impacted when we perform certain regulatory inspections,
which we refer to as a 5-year survey, or special survey, that are due every five years for each of
our rigs. Operating revenue decreases because these surveys are performed during scheduled
downtime in a shipyard. Operating expenses increase as a result of these surveys due to the cost
to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs.
Repair and maintenance costs may be required resulting from the survey or may have been previously
planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year
survey will vary from year to year.
In addition, operating income may be negatively impacted by intermediate surveys, which are
performed at interim periods between 5-year surveys. Intermediate surveys are generally less
extensive in duration and scope than a 5-year survey. Although an intermediate survey may require
some downtime for the drilling rig, it normally does not require dry-docking or shipyard time,
except for our rigs located in the North Sea which require shipyard time.
Mobilization costs are a significant component of our survey-related costs. Mobilization,
survey and maintenance costs incurred during the first three quarters of 2007 should not be taken
as indicative of future quarterly costs for such activities.
Effective May 1, 2007, we renewed our principal insurance policies. For physical
damage coverage, our deductible is $75.0 million per occurrence (or lower for some rigs if they are
declared a constructive total loss). For physical damage due to named windstorms in the U.S. Gulf
of Mexico, there is an annual aggregate limit of $125.0 million. If named windstorms in the U.S.
Gulf of Mexico cause significant damage to our rigs or equipment, it could have a material adverse
effect on our financial position, results of operations or cash flows.
23
Construction and Capital Upgrade Projects. We capitalize interest cost for the construction
and upgrade of qualifying assets in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 34, Capitalization of Interest Cost, or SFAS 34. During 2006 and 2005, we began
capitalizing interest on our two capital upgrade projects and the construction of our two new
jack-up rigs. Pursuant to SFAS 34, 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. In 2006 we began
capitalizing interest on expenditures related to the capital upgrade of the Ocean Monarch and the
construction of our two jack-up rigs, and in 2005, we began capitalizing interest on expenditures
related to the upgrade of the Ocean Endeavor. See Note 1 General Information Capitalized
Interest to our consolidated financial statements included in Item 1 of Part I of this report.
The upgrade of the Ocean Endeavor has been completed and the rig arrived in the GOM late in
the second quarter of 2007, where it is currently operating. We have capitalized interest costs
related to this upgrade through the end of March 2007 and began depreciating the newly upgraded rig
effective April 1, 2007. As a result of the completion of the upgrade of the Ocean Endeavor, we
anticipate that depreciation and interest expense in 2007 will increase by approximately $6 million
(representing nine months of expense) and $2.5 million, respectively.
Critical Accounting Estimates
Our significant accounting policies are discussed in Note 1 of our notes to consolidated
financial statements included in Item 1 of Part I of this report and in Note 1 of our notes to
audited consolidated financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2006. There were no material changes to these policies during the nine months
ended September 30, 2007.
24
Results of Operations
Three Months Ended September 30, 2007 and 2006
Comparative data relating to our revenues and operating expenses by equipment type are listed
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
258,679 |
|
|
$ |
191,786 |
|
|
$ |
66,893 |
|
Intermediate Semisubmersibles |
|
|
255,795 |
|
|
|
189,521 |
|
|
|
66,274 |
|
Jack-ups |
|
|
113,772 |
|
|
|
117,146 |
|
|
|
(3,374 |
) |
|
|
|
Total Contract Drilling Revenue |
|
$ |
628,246 |
|
|
$ |
498,453 |
|
|
$ |
129,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Related to Reimbursable Expenses |
|
$ |
15,716 |
|
|
$ |
16,003 |
|
|
$ |
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
93,812 |
|
|
$ |
61,882 |
|
|
$ |
(31,930 |
) |
Intermediate Semisubmersibles |
|
|
136,261 |
|
|
|
111,748 |
|
|
|
(24,513 |
) |
Jack-ups |
|
|
47,392 |
|
|
|
41,143 |
|
|
|
(6,249 |
) |
Other |
|
|
4,635 |
|
|
|
10,110 |
|
|
|
5,475 |
|
|
|
|
Total Contract Drilling Expense |
|
$ |
282,100 |
|
|
$ |
224,883 |
|
|
$ |
(57,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable Expenses |
|
$ |
13,584 |
|
|
$ |
13,982 |
|
|
$ |
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
164,867 |
|
|
$ |
129,904 |
|
|
$ |
34,963 |
|
Intermediate Semisubmersibles |
|
|
119,534 |
|
|
|
77,773 |
|
|
|
41,761 |
|
Jack-ups |
|
|
66,380 |
|
|
|
76,003 |
|
|
|
(9,623 |
) |
Other |
|
|
(4,635 |
) |
|
|
(10,110 |
) |
|
|
5,475 |
|
Reimbursable expenses, net |
|
|
2,132 |
|
|
|
2,021 |
|
|
|
111 |
|
Depreciation |
|
|
(57,565 |
) |
|
|
(49,757 |
) |
|
|
(7,808 |
) |
General and administrative expense |
|
|
(13,105 |
) |
|
|
(9,959 |
) |
|
|
(3,146 |
) |
Gain on disposition of assets |
|
|
363 |
|
|
|
272 |
|
|
|
91 |
|
|
|
|
Total Operating Income |
|
$ |
277,971 |
|
|
$ |
216,147 |
|
|
$ |
61,824 |
|
|
|
|
Demand remained strong for our rigs in all markets and geographic regions during the third
quarter of 2007, except for the jack-up market in the GOM. Continued high overall utilization and
historically high dayrates resulted in an overall increase in our operating income of $61.8
million, or 29%, to $278.0 million, compared to $216.1 million in the third quarter of 2006.
Dayrates, excluding GOM jack-ups, have generally increased since the third quarter of 2006,
resulting in the generation of additional contract drilling revenues by our fleet. However,
overall revenue increases were negatively impacted by the effect of downtime associated with
scheduled shipyard projects and surveys, as well as the temporary ready-stacking of drilling rigs
between wells in the GOM jack-up market. Total contract drilling revenues during the third quarter
of 2007 increased $129.8 million, or 26%, compared to the same period in 2006, to $628.2 million.
Overall cost increases for maintenance and repairs between 2007 and 2006 reflect the impact of
high, sustained utilization of our drilling units across our fleet and in all geographic locations
in which we operate, additional survey and related maintenance costs as many of our drilling rigs
were off-contract during 2007 for scheduled surveys, as well as the inclusion of normal operating
costs for the newly upgraded Ocean Endeavor. The increase in overall operating and overhead costs
also reflects the impact of higher prices throughout the offshore drilling industry and its support
businesses. Total contract drilling expenses in the third quarter of 2007 increased $57.2 million,
or 25% compared to the same period in 2006, to $282.1 million.
25
High-Specification Floaters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
HIGH-SPECIFICATION FLOATERS: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
207,450 |
|
|
$ |
144,283 |
|
|
$ |
63,167 |
|
Australia/Asia/Middle East |
|
|
16,837 |
|
|
|
16,537 |
|
|
|
300 |
|
South America |
|
|
34,392 |
|
|
|
30,966 |
|
|
|
3,426 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
258,679 |
|
|
$ |
191,786 |
|
|
$ |
66,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
66,211 |
|
|
$ |
38,598 |
|
|
$ |
(27,613 |
) |
Australia/Asia/Middle East |
|
|
6,935 |
|
|
|
6,121 |
|
|
|
(814 |
) |
South America |
|
|
20,666 |
|
|
|
17,163 |
|
|
|
(3,503 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
93,812 |
|
|
$ |
61,882 |
|
|
$ |
(31,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
164,867 |
|
|
$ |
129,904 |
|
|
$ |
34,963 |
|
|
|
|
GOM. Revenues generated by our high-specification floaters operating in the GOM increased
$63.2 million during the third quarter of 2007 compared to the same period in 2006, primarily due
to higher average dayrates earned during the period ($57.6 million). Average operating revenue per
day for our rigs in this market, excluding the Ocean Endeavor, increased to $366,500 during the
third quarter of 2007 compared to $241,400 for the same period of 2006, reflecting the continued
high demand for this class of rig in the GOM, as several of our rigs began operating under new
contracts at increased dayrates subsequent to the third quarter of 2006. Our newly upgraded rig,
the Ocean Endeavor, began operating during the third quarter of 2007 and generated revenues of
$17.7 million.
Average utilization for our high-specification rigs operating in the GOM, excluding the Ocean
Endeavor, decreased from 92% during the third quarter of 2006 to 80% in the third quarter of 2007,
and resulted in a $10.9 million decline in revenues comparing the periods. The decline in
utilization during the third quarter of 2007 was primarily the result of scheduled downtime for
special surveys for the Ocean Baroness (92 days) and the Ocean Star (29 days). Combined
utilization for both of these rigs during the third quarter of 2006 was nearly 100%.
Operating costs during the third quarter of 2007 for our high-specification floaters in the
GOM increased $27.6 million over the same period in 2006 to $66.2 million (including $7.1 million
in normal operating expenses for the Ocean Endeavor). The increase in operating costs during the
third quarter of 2007 compared to the same period in 2006 also reflects higher labor and benefits
costs resulting from regular pay increases and promotions and survey, mobilization and related
repair costs for the Ocean Baroness and Ocean Star. Other overall cost increases were partially
offset by a reduction in inspection and project costs related to the Ocean Confidences survey in
the third quarter of 2006, as well as the absence of uninsured repair/recovery costs associated
with a subsea incident that occurred in the 2006 period.
South America. Revenues for our high-specification floaters operating offshore Brazil
increased $3.4 million to $34.4 million for the third quarter of 2007 compared to $31.0 million for
the same period in 2006. Average operating revenue per day for our rigs in this market increased
to $190,000 during the third quarter of 2007 compared to $177,000 during the same period of 2006
and resulted in the generation of $2.5 million of additional revenues. Utilization for the third
quarter of 2007 increased to 98% from 95% during the comparable period of 2006 primarily due to
lower unpaid downtime for repairs and resulted in the generation of additional revenues of $0.9
million.
Contract drilling expense for our operations in Brazil increased $3.5 million during the third
quarter of 2007 compared to the same period in 2006. The increase in costs is primarily due to
higher labor and benefits costs as a result of regular pay increases and promotions, as well as
higher maintenance and project costs during the third quarter of 2007 compared to the same period
in 2006.
26
Intermediate Semisubmersibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
INTERMEDIATE SEMISUBMERSIBLES: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
37,204 |
|
|
$ |
58,103 |
|
|
$ |
(20,899 |
) |
Mexican GOM |
|
|
13,916 |
|
|
|
19,007 |
|
|
|
(5,091 |
) |
Australia/Asia/Middle East |
|
|
70,369 |
|
|
|
46,839 |
|
|
|
23,530 |
|
Europe/Africa/Mediterranean |
|
|
107,523 |
|
|
|
47,667 |
|
|
|
59,856 |
|
South America |
|
|
26,783 |
|
|
|
17,905 |
|
|
|
8,878 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
255,795 |
|
|
$ |
189,521 |
|
|
$ |
66,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
30,178 |
|
|
$ |
27,299 |
|
|
$ |
(2,879 |
) |
Mexican GOM |
|
|
17,660 |
|
|
|
15,269 |
|
|
|
(2,391 |
) |
Australia/Asia/Middle East |
|
|
29,816 |
|
|
|
22,261 |
|
|
|
(7,555 |
) |
Europe/Africa/Mediterranean |
|
|
36,049 |
|
|
|
33,359 |
|
|
|
(2,690 |
) |
South America |
|
|
22,558 |
|
|
|
13,560 |
|
|
|
(8,998 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
136,261 |
|
|
$ |
111,748 |
|
|
$ |
(24,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
119,534 |
|
|
$ |
77,773 |
|
|
$ |
41,761 |
|
|
|
|
GOM. Revenues generated during the third quarter of 2007 by our intermediate semisubmersible
fleet decreased $20.9 million compared to the same quarter of 2006 primarily due to the relocation
of the Ocean Lexington to Egypt in the fourth quarter of 2006 and shipyard time for three of our
other intermediate semisubmersibles in this market during the third quarter of 2007. Utilization
for our four intermediate semisubmersible rigs marketed in the GOM during the third quarter of both
2007 and 2006 (Ocean Voyager, Ocean Concord, Ocean New Era and Ocean Saratoga) declined from 74% in
the third quarter of 2006 to 55% in the third quarter of 2007, negatively impacting revenues by
$11.5 million. During the 2007 period, the Ocean New Era and the Ocean Voyager underwent five-year
surveys and preparation activities for 2-1/2 year contracts in the Mexican GOM that are expected to
commence in the fourth quarter of 2007. The Ocean Concord was also in a shipyard for part of the
third quarter of 2007 preparing for a five-year term contract offshore Brazil that is expected to
begin in the fourth quarter of 2007. During the third quarter of 2006, the Ocean Lexington
generated revenues of $14.2 million in the GOM.
The decline in revenues in the third quarter of 2007 was partially offset by an increase in
average dayrates earned by our intermediate semisubmersible rigs operating in the GOM. Average
operating revenue per day increased from $160,000 during the third quarter of 2006 to $184,100
during the third quarter of 2007 and contributed additional revenues of $4.9 million.
During the third quarter of 2007, the Ocean Worker and Ocean Yorktown completed their
contracts with PEMEX in the Mexican GOM and temporarily returned to the GOM for surveys and
contract preparation activities. During the third quarter of 2007, we incurred additional
operating expenses in the GOM associated with surveys and contract preparation activities for these
rigs, as well as the Ocean Voyager, Ocean New Era and Ocean Concord. Four of these rigs are
expected to depart from the GOM during the fourth quarter of 2007 and the remaining rig is expected
to mobilize to Brazil during the second quarter of 2008.
The increased costs associated with projects and surveys, as well as normal pay increases and
promotions, were partially offset by the absence of costs incurred during the third quarter of 2006
related to contract preparation activities for the Ocean Lexington, costs associated with the Ocean
Voyagers mooring system upgrade and special survey and life extension project costs for the Ocean
Saratoga and the Ocean Whittington upon its return from the Mexican GOM in July 2006.
Mexican GOM. Revenues generated by our intermediate semisubmersible rigs operating in the
Mexican GOM decreased $5.1 million during the third quarter of 2007 compared to the same period of
2006 primarily due to the
27
relocation of the Ocean Yorktown and Ocean Worker to a shipyard in the
GOM upon completion of their contracts with PEMEX during the third quarter of 2007. In addition,
the Ocean Whittington generated revenues of $1.4 million in the Mexican GOM prior to its return to
the GOM for a survey and life extension project in July 2006.
Our operating costs in the Mexican GOM increased by $2.4 million during the third quarter of
2007 compared to the third quarter of 2006, primarily due to the inclusion of mobilization costs
for the Ocean Worker and Ocean Yorktown from Mexico to the GOM. These cost increases were
partially offset by the absence of operating costs for the Ocean Whittington, which relocated from
the Mexican GOM during the third quarter of 2006.
Australia/Asia/MiddleEast. Revenues generated by our intermediate semisubmersibles working in
the Australia/Asia/Middle East regions increased $23.5 million during the third quarter of 2007
compared to the third quarter of 2006 primarily due to an increase in the average operating revenue
per day from $129,500 in the third quarter of 2006 to $184,000 during the third quarter of 2007,
which generated additional revenues of $21.5 million in the third quarter of 2007. This increase
is primarily attributable to an increase in the contractual dayrate earned by the Ocean Patriot
that was achieved in the third quarter of 2007 ($18.8 million).
Additionally, during the third quarter of 2007, we recognized $1.4 million in deferred
mobilization revenue in connection with the relocation of the Ocean Epoch and the Ocean General to
other areas within the Australia/Asia region.
Contract drilling expense for the Australia/Asia/Middle East region increased $7.6 million for
the third quarter of 2007 compared to the third quarter of 2006. The increase in operating costs
was primarily due to higher local labor costs for the Ocean Epoch, which worked offshore Australia
during the third quarter of 2007 compared to the same period in 2006 when the rig worked offshore
Malaysia, and the Ocean Patriot, which worked offshore New Zealand during the third quarter of 2007
compared to working offshore Australia for most of the third quarter of 2006. Other cost increases
for our rigs operating in this region include higher repair and maintenance costs and higher
personnel-related costs, including expatriate salaries, catering and travel.
Europe/Africa/Mediterranean. Operating revenue for our intermediate semisubmersibles working
in the Europe/Africa/Mediterranean regions increased $59.9 million during the third quarter of 2007
compared to the third quarter of 2006. Overall utilization during the third quarter of 2007
increased primarily due to the relocation of the Ocean Lexington ($25.9 million) from the GOM to
offshore Egypt in the fourth quarter of 2006. Additionally, the Ocean Princess generated
additional revenues of $7.1 million during the third quarter of 2007 compared to the third quarter
of 2006 when the rig had 48 days of downtime for an intermediate survey and related repairs.
Average operating revenue per day for our rigs in this market (excluding the Ocean Lexington)
increased from $150,000 during the third quarter of 2006 to $228,900 in the third quarter of 2007
and contributed $28.1 million in additional revenue during the third quarter of 2007, as compared
to the same period in 2006. The overall increase in average operating revenue per day in this
market was primarily due to higher dayrates earned by the Ocean Nomad, Ocean Guardian and Ocean
Vanguard during the 2007 period.
Contract drilling expense for our intermediate semisubmersible rigs operating in the
Europe/Africa/Mediterranean markets increased $2.7 million during the third quarter of 2007
compared to the same period in 2006, partially due to the inclusion of normal operating costs for
the Ocean Lexington ($6.2 million) operating offshore Egypt in 2007. The increase in operating
expenses also reflects higher labor and benefits costs incurred during the third quarter of 2007
for our rigs operating in the North Sea, higher shorebase support costs and higher maintenance and
project costs to maintain our drilling rigs in this region. These costs were partially offset by
the absence of mobilization, inspection and related repair costs for the Ocean Princess during the
third quarter of 2007 that were associated with the rigs 2006 intermediate survey.
South America. Our intermediate semisubmersibles working offshore Brazil generated revenues
of $26.8 million in the third quarter of 2007 compared to revenues of $17.9 million in the
comparable period of 2006. The Ocean Whittington, which began operating in Brazil during the third
quarter of 2007, generated revenues of $6.8 million and incurred operating expenses of $7.1
million. Utilization improvements in the third quarter of 2007 compared to the same period in 2006
contributed an additional $2.4 million to current period revenues. The favorable impact of higher
utilization for the Ocean Yatzy during the third quarter of 2007 compared to the third quarter of
2006, when the rig had approximately 35 days of downtime for a thruster change-out, was partially
offset
by the impact of approximately 20 days of unpaid downtime incurred by the Ocean Winner for repairs
during the third quarter of 2007.
28
Operating expenses for our operations offshore Brazil increased $9.0 million in the third
quarter of 2007, as compared to the same period in 2006, primarily due to the inclusion of
operating and start-up costs for the Ocean Whittington. Other cost increases in the third quarter
of 2007 include increased labor costs, other personnel-related costs, shorebase support and freight
costs, as well as higher repair and maintenance costs.
Jack-Ups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
JACK-UPS: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
55,256 |
|
|
$ |
86,027 |
|
|
$ |
(30,771 |
) |
Mexican GOM |
|
|
15,895 |
|
|
|
|
|
|
|
15,895 |
|
Australia/Asia/Middle East |
|
|
23,403 |
|
|
|
17,580 |
|
|
|
5,823 |
|
Europe/Africa/Mediterranean |
|
|
19,218 |
|
|
|
13,539 |
|
|
|
5,679 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
113,772 |
|
|
$ |
117,146 |
|
|
$ |
(3,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
30,193 |
|
|
$ |
29,237 |
|
|
$ |
(956 |
) |
Mexican GOM |
|
|
4,273 |
|
|
|
|
|
|
|
(4,273 |
) |
Australia/Asia/Middle East |
|
|
7,301 |
|
|
|
7,372 |
|
|
|
71 |
|
Europe/Africa/Mediterranean |
|
|
5,625 |
|
|
|
4,534 |
|
|
|
(1,091 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
47,392 |
|
|
$ |
41,143 |
|
|
$ |
(6,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
66,380 |
|
|
$ |
76,003 |
|
|
$ |
(9,623 |
) |
|
|
|
GOM. Revenues generated by our jack-up rigs operating in the GOM decreased $30.8 million
during the third quarter of 2007 compared to the third quarter of 2006. The decline in revenues is
primarily due to the relocation of the Ocean King, which generated $10.6 million in GOM revenues
during the third quarter of 2006, to Croatia during the third quarter of 2007 and the Ocean Nugget,
which generated $1.9 million in revenues in the GOM market during the third quarter of 2006, to the
Mexican GOM in the fourth quarter of 2006. In addition, average utilization (excluding the Ocean
King and the Ocean Nugget) declined from 95% during the third quarter of 2006 to 81% during the
third quarter of 2007 and resulted in a reduction in revenues of $10.4 million. The decline in
utilization was primarily in response to market conditions in the GOM that caused the
ready-stacking of three of our jack-up rigs for a portion of time between wells and scheduled
downtime for the Ocean Crusaders survey and contract preparation activities for the Ocean
Columbia. The Ocean Columbia is expected to depart the GOM and begin an 18-month contract in the
Mexican GOM in the fourth quarter of 2007.
During the third quarter of 2007, average operating revenues per day for our GOM jack-up fleet
(excluding the Ocean King and Ocean Nugget) declined to $92,200 from $105,400 during the third
quarter of 2006. This decline in average operating revenue per day reduced revenues by $7.9
million during the third quarter of 2007.
Contract drilling expense in the GOM increased $1.0 million during the third quarter of 2007
compared to the same period of 2006. Increased operating costs associated with a survey and
related repairs for the Ocean Crusader and contract preparation activities for the Ocean Columbia,
as well as increased repair and ready-stacking costs for the Ocean Drake, were mostly offset by the
absence of operating costs in the GOM for the Ocean Nugget and Ocean King during the third quarter
of 2007 and the absence of 2006 survey and mobilization costs for the Ocean Summit.
Mexican GOM. The Ocean Nugget, which began operating in the Mexican GOM in the fourth quarter
of 2006, generated $15.9 million in revenue during the third quarter of 2007 and incurred contract
drilling expenses of $4.3 million. We had no jack-up rigs operating in this market during the
comparable quarter of 2006.
29
Australia/Asia/Middle East. Our two jack-up rigs operating in the Australia/Asia/Middle East
regions generated $23.4 million in revenues during the third quarter of 2007 compared to $17.6
million for the same period in 2006. The $5.8 million increase in revenues was due in part to an
increase in average operating dayrates ($3.1 million). Our average operating revenue per day
increased to $127,300 during the third quarter of 2007 from $116,300 in the third quarter of 2006,
primarily due to higher contracted dayrates for both the Ocean Heritage and the Ocean Sovereign
during the third quarter of 2007 compared to the dayrate earned during the same period of 2006.
Increased utilization during the third quarter of 2007 for the Ocean Sovereign, as compared to the
third quarter of 2006 when the rig was undergoing an inspection and related repairs, resulted in
the generation of additional revenues of $2.6 million.
Europe/Africa/Mediterranean. The Ocean Spur began operating in this region during March 2006
and generated revenues of $13.5 million during the third quarter of 2006 offshore Tunisia. The rig
subsequently mobilized to the Mediterranean Basin and began operating offshore Egypt in late May
2007 earning revenues of $19.2 million during the third quarter of 2007.
Reimbursable expenses, net.
Revenues related to reimbursable items, offset by the related expenditures for these items,
were $2.1 million and $2.0 million for the quarters ended September 30, 2007 and 2006,
respectively. Reimbursable expenses include items that we purchase, and/or services we perform, at
the request of our customers. We charge our customers for purchases and/or services performed on
their behalf at cost, plus a mark-up where applicable. Therefore, net reimbursables fluctuate
based on customer requirements, which vary.
Depreciation.
Depreciation expense increased $7.8 million to $57.6 million in the third quarter of 2007
compared to $49.8 million in the third quarter of 2006, primarily due to depreciation associated
with capital additions in 2006 and the first nine months of 2007, as well as higher depreciation
expense for the Ocean Endeavor due to the completion of its major upgrade in March 2007.
General and Administrative Expense.
We incurred general and administrative expense of $13.1 million in the third quarter of 2007
compared to $10.0 million for the same period in 2006. The $3.1 million increase in overhead costs
between the periods was primarily due to an increase in payroll costs resulting from higher
compensation and staffing increases, as well as legal fees.
Interest Expense.
We recorded interest expense for the third quarter of 2007 of $2.3 million, representing a
$3.8 million decrease in interest cost compared to the same period in 2006. This decrease was
primarily attributable to lower interest cost associated with our 1.5% Convertible Senior
Debentures Due 2031, or 1.5% Debentures, due to conversions of these debentures into shares of our
common stock during 2007. Interest expense was further reduced during the third quarter of 2007 by
capitalized interest on qualifying construction expenditures.
Income Tax Expense.
Our net income tax expense or benefit is a function of the mix between our domestic and
international pre-tax earnings or losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Certain of our international rigs are owned or operated,
directly or indirectly, by Diamond Offshore International Limited, a Cayman Islands company which
is one of our wholly owned subsidiaries. Earnings from this subsidiary are reinvested
internationally and remittance to the U.S. is indefinitely postponed. Consequently, no U.S. tax
expense or benefits were recognized on these earnings or losses in 2007 or 2006.
We recognized income tax expense of $82.7 million on pre-tax income of $288.2 million during
the three months ended September 30, 2007 compared to income tax expense of $58.6 million on
pre-tax income of $223.0 million for the three months ended September 30, 2006. Our estimated
annual effective tax rate was 27.9% as of September 30, 2007 and 28.1% as of September 30, 2006.
Income tax expense for the three months ended September 30, 2007 also included expense of $4.4
million related to 2006 return to provision adjustments.
30
Nine Months Ended September 30, 2007 and 2006
Comparative data relating to our revenue and operating expenses by equipment type are listed
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
769,087 |
|
|
$ |
545,702 |
|
|
$ |
223,385 |
|
Intermediate Semisubmersibles |
|
|
725,753 |
|
|
|
562,324 |
|
|
|
163,429 |
|
Jack-ups |
|
|
359,245 |
|
|
|
323,470 |
|
|
|
35,775 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
1,854,085 |
|
|
$ |
1,431,496 |
|
|
$ |
422,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Related to Reimbursable Expenses |
|
$ |
46,936 |
|
|
$ |
42,878 |
|
|
$ |
4,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
226,371 |
|
|
$ |
178,026 |
|
|
$ |
(48,345 |
) |
Intermediate Semisubmersibles |
|
|
347,859 |
|
|
|
293,819 |
|
|
|
(54,040 |
) |
Jack-ups |
|
|
131,069 |
|
|
|
113,223 |
|
|
|
(17,846 |
) |
Other |
|
|
14,534 |
|
|
|
14,203 |
|
|
|
(331 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
719,833 |
|
|
$ |
599,271 |
|
|
$ |
(120,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable Expenses |
|
$ |
40,226 |
|
|
$ |
37,083 |
|
|
$ |
(3,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
542,716 |
|
|
$ |
367,676 |
|
|
$ |
175,040 |
|
Intermediate Semisubmersibles |
|
|
377,894 |
|
|
|
268,505 |
|
|
|
109,389 |
|
Jack-ups |
|
|
228,176 |
|
|
|
210,247 |
|
|
|
17,929 |
|
Other |
|
|
(14,534 |
) |
|
|
(14,203 |
) |
|
|
(331 |
) |
Reimbursable expenses, net |
|
|
6,710 |
|
|
|
5,795 |
|
|
|
915 |
|
Depreciation |
|
|
(171,605 |
) |
|
|
(148,858 |
) |
|
|
(22,747 |
) |
General and administrative expense |
|
|
(37,245 |
) |
|
|
(29,786 |
) |
|
|
(7,459 |
) |
Gain (loss) on disposition of assets |
|
|
5,418 |
|
|
|
(2,191 |
) |
|
|
7,609 |
|
|
|
|
Total Operating Income |
|
$ |
937,530 |
|
|
$ |
657,185 |
|
|
$ |
280,345 |
|
|
|
|
Demand remained strong for our rigs in all markets and geographic regions during the first
nine months of 2007, except for the jack-up market in the GOM. Continued high overall utilization
and historically high dayrates resulted in an overall increase in our operating income of $280.3
million, or 43%, to $937.5 million compared to $657.2 million for the nine months ended September
30, 2006. Dayrates have continued to increase in certain of the markets where we operate since the
third quarter of 2006, resulting in the generation of additional contract drilling revenues by our
fleet. However, overall revenue increases were negatively impacted by the effect of downtime
associated with scheduled shipyard projects and surveys, as well as the temporary ready-stacking of
drilling rigs between wells in the GOM jack-up market. Total contract drilling revenues during the
first nine months of 2007 increased $422.6 million, or 30%, to $1.9 billion compared to $1.4
billion for the nine months ended September 30, 2006.
Overall cost increases for maintenance and repairs between 2007 and 2006 reflect the impact of
high, sustained utilization of our drilling units across our fleet and in all geographic locations
in which we operate, additional survey and related maintenance costs, as well as the inclusion of
normal operating costs for the newly upgraded Ocean Endeavor. The increase in overall operating
and overhead costs also reflects the impact of higher prices throughout the offshore drilling
industry and its support businesses. Our results were also impacted by higher expenses related to
our mooring enhancement and other hurricane preparedness activities in 2006 and regular pay
increases and promotions during the periods. Total contract drilling expenses for the first nine
months of 2007 increased $120.6 million, or 20% compared to the same period in 2006, to $719.8
million.
31
High-Specification Floaters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
HIGH-SPECIFICATION FLOATERS: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
618,056 |
|
|
$ |
403,948 |
|
|
$ |
214,108 |
|
Australia/Asia/Middle East |
|
|
53,157 |
|
|
|
47,688 |
|
|
|
5,469 |
|
South America |
|
|
97,874 |
|
|
|
94,066 |
|
|
|
3,808 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
769,087 |
|
|
$ |
545,702 |
|
|
$ |
223,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
144,941 |
|
|
$ |
108,916 |
|
|
$ |
(36,025 |
) |
Australia/Asia/Middle East |
|
|
19,759 |
|
|
|
17,971 |
|
|
|
(1,788 |
) |
South America |
|
|
61,671 |
|
|
|
51,139 |
|
|
|
(10,532 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
226,371 |
|
|
$ |
178,026 |
|
|
$ |
(48,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
542,716 |
|
|
$ |
367,676 |
|
|
$ |
175,040 |
|
|
|
|
GOM. Revenues generated by our high-specification floaters operating in the GOM increased
$214.1 million during the first nine months of 2007 compared to the same period in 2006, primarily
due to higher average dayrates earned during the period ($205.5 million). Average operating
revenue per day for our rigs in this market, excluding the Ocean Endeavor, increased to $346,300
during the first nine months of 2007 compared to $224,000 for the same period of 2006, reflecting
the continued high demand for this class of rig in the GOM. Excluding the Ocean Endeavor, six of
our seven other high-specification semisubmersible rigs in the GOM are currently operating at
dayrates higher than those they earned during the third quarter of 2006. The Ocean Endeavor began
operating during the third quarter of 2007 and generated revenues of $17.7 million in the GOM.
Average utilization for our high-specification rigs operating in the GOM, excluding the Ocean
Endeavor, decreased from 93% during the first nine months of 2006 to 91% for the first nine months
of 2007 and resulted in a $5.3 million decline in revenues comparing the periods. The decline in
utilization during the 2007 period was primarily the result of scheduled downtime for special
surveys for the Ocean Baroness (99 days) and the Ocean Star (48 days). Combined utilization for
both of these rigs during the comparable period in 2006 was 93%.
Operating costs during the first nine months of 2007 for our high-specification floaters in
the GOM increased $36.0 million over the same period in 2006 to $144.9 million (including $9.7
million in normal operating expenses for the Ocean Endeavor). The increase in operating costs in
the first nine months of 2007 compared to the same period in 2006 reflects higher labor, benefits
and other personnel-related costs resulting from regular pay increases and promotions, higher
maintenance and project costs and mobilization and survey costs for the Ocean Baroness and Ocean
Star.
Australia/Asia/Middle East. Revenues generated by the Ocean Rover increased $5.5 million
during the first nine months of 2007, compared to the same period in 2006, primarily due to a
higher operating dayrate earned by the rig during the first three months of 2007.
Operating expenses for the Ocean Rover for the first nine months of 2007 increased $1.8
million to $19.8 million compared to the first nine months of 2006, primarily due to higher labor,
benefits and maintenance and project costs, partially offset by lower insurance costs.
South America. Revenues earned by our high-specification floaters operating offshore Brazil
increased $3.8 million to $97.9 million for the nine months ended September 30, 2007 compared to
the first nine months of 2006. Average operating revenue per day increased to $185,300 for the
first nine months of 2007 compared to $179,700 for the comparable period in 2006 and generated
additional revenues of $3.1 million.
Contract drilling expense for our operations in Brazil increased $10.5 million during the nine
months ended September 30, 2007 compared to the same period in 2006. The increase in costs is
primarily due to higher labor and
32
benefits costs as a result of regular pay increases and
promotions, as well as higher catering, maintenance and project costs during the first nine months
of 2007 compared to the same period in 2006.
Intermediate Semisubmersibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
INTERMEDIATE SEMISUBMERSIBLES: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
145,101 |
|
|
$ |
156,800 |
|
|
$ |
(11,699 |
) |
Mexican GOM |
|
|
45,442 |
|
|
|
62,351 |
|
|
|
(16,909 |
) |
Australia/Asia/Middle East |
|
|
175,204 |
|
|
|
139,257 |
|
|
|
35,947 |
|
Europe/Africa/Mediterranean |
|
|
291,967 |
|
|
|
146,971 |
|
|
|
144,996 |
|
South America |
|
|
68,039 |
|
|
|
56,945 |
|
|
|
11,094 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
725,753 |
|
|
$ |
562,324 |
|
|
$ |
163,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
63,957 |
|
|
$ |
62,282 |
|
|
$ |
(1,675 |
) |
Mexican GOM |
|
|
44,810 |
|
|
|
46,000 |
|
|
|
1,190 |
|
Australia/Asia/Middle East |
|
|
80,852 |
|
|
|
64,597 |
|
|
|
(16,255 |
) |
Europe/Africa/Mediterranean |
|
|
104,266 |
|
|
|
82,713 |
|
|
|
(21,553 |
) |
South America |
|
|
53,974 |
|
|
|
38,227 |
|
|
|
(15,747 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
347,859 |
|
|
$ |
293,819 |
|
|
$ |
(54,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
377,894 |
|
|
$ |
268,505 |
|
|
$ |
109,389 |
|
|
|
|
GOM. Revenues generated during the nine months ended September 30, 2007 by our intermediate
semisubmersible fleet decreased $11.7 million compared to the same period of 2006, primarily due to
the relocation of the Ocean Lexington to Egypt in the fourth quarter of 2006, as well as shipyard
time for three of our other intermediate semisubmersibles in this market during the first nine
months of 2007. Utilization for our four intermediate semisubmersible rigs marketed in the GOM
during the first nine months of both 2007 and 2006 (Ocean Voyager, Ocean Concord, Ocean New Era and
Ocean Saratoga) declined from 87% in the first nine months of 2006 to 74% during the first nine
months of 2007 and negatively impacted revenues by $18.9 million. During the 2007 period, the
Ocean New Era and the Ocean Voyager underwent five-year surveys and preparation activities for
2-1/2 year contracts in the Mexican GOM that are expected to commence in the fourth quarter of
2007. The Ocean Concord was also in a shipyard for part of the third quarter of 2007 preparing for
a five-year term contract in Brazil that is expected to begin in the fourth quarter of 2007. Lower
utilization in 2007 also resulted from a planned life extension project for the Ocean Saratoga that
began in the third quarter of 2006 and continued into 2007. During the first nine months of 2006,
the Ocean Lexington generated revenues of $33.4 million in the GOM.
The decline in revenues for the nine months ended September 30, 2007 was partially offset by
an increase in average dayrates earned by our intermediate semisubmersible rigs operating in the
GOM during both 2006 and 2007. Average operating revenue per day increased from $129,300 during
the first nine months of 2006 to $179,600 during the same period in 2007 and contributed additional
revenues of $40.6 million.
During the third quarter of 2007, the Ocean Worker and Ocean Yorktown completed their
contracts with PEMEX in the Mexican GOM and temporarily returned to the GOM for surveys and
contract preparation activities. During the nine months ended September 30, 2007, we incurred
additional operating expenses in the GOM associated with surveys and contract preparation
activities for these rigs, as well as Ocean Voyager, Ocean New Era, Ocean Concord and Ocean
Whittington. Four of these rigs are expected to depart from the GOM during the fourth quarter of
2007 and the remaining rig is expected to mobilize to Brazil during the second quarter of 2008.
The Ocean Whittington departed the GOM for Brazil in May 2007.
Increased operating costs associated with projects and surveys were partially offset by the
absence of costs during the nine months ended September 30, 2007 for the Ocean Lexington and costs
associated with the Ocean Voyagers mooring system upgrade in 2006. In addition, operating costs
for our rigs in this market were negatively impacted by regular salary increases and promotions
occurring in the first nine months of 2007.
33
Mexican GOM. Revenues generated by our intermediate semisubmersible rigs operating in the
Mexican GOM decreased $16.9 million during the first nine months of 2007 compared to the same
period of 2006, primarily due to the return of the Ocean Whittington ($12.7 million) to the GOM for
a survey and life extension project in July 2006 after completion of its contract with PEMEX. In
addition, during the third quarter of 2007, the Ocean Worker and Ocean Yorktown also completed
their contracts with PEMEX and have temporarily returned to the GOM for surveys and contract
preparation activities.
Our operating costs in the Mexican GOM decreased by $1.2 million in the first nine months of
2007 compared to the same period in 2006, primarily due to the absence of operating costs for the
Ocean Whittington ($11.7 million), partially offset by costs to mobilize the Ocean Worker and Ocean
Yorktown from Mexico to the GOM.
Australia/Asia/Middle East. Our intermediate semisubmersibles working in the
Australia/Asia/Middle East regions generated revenues of $175.2 million during the nine months
ended September 30, 2007 compared to revenues of $139.3 million for the comparable period of 2006.
The $35.9 million increase in operating revenue was primarily due to an increase in average
operating revenue per day from $127,800 in the first nine months of 2006 to $163,500 during the
first nine months of 2007, which generated additional revenues of $36.1 million during the 2007
period. The increase in average operating revenue per day is primarily attributable to an increase
in the contractual dayrates earned by the Ocean Patriot that occurred in the third quarter of 2007,
and the Ocean Epoch and Ocean General that occurred during the second and third quarters of 2006,
respectively.
Average utilization in this region decreased to 96% during the first nine months of 2007 from
nearly 100% utilization during the comparable period of 2006, primarily due to 40 days of
additional unpaid downtime for the Ocean General for a survey and various equipment repairs. The
decline in utilization during 2007 reduced revenues by $3.0 million. Additionally, during the nine
months ended September 30, 2007, we recognized $3.4 million in deferred mobilization revenue in
connection with the relocation of the Ocean Epoch and the Ocean General to other areas within the
Australia/Asia region.
Contract drilling expense for the Australia/Asia/Middle East region increased $16.3 million
for the nine months ended September 30, 2007 compared to the same period in 2006. The increase in
operating costs was primarily due to higher local labor costs for the Ocean Epoch, which worked
offshore Australia during the first nine months of 2007 compared to the same period in 2006 when
the rig worked offshore Malaysia. Other cost increases for our rigs operating in this region
during the first nine months of 2007, as compared to the same period in 2006, include higher repair
and maintenance costs, higher personnel-related costs, including catering and travel, and higher
freight costs, partially offset by lower agency fee costs incurred by the Ocean Epoch during its
operations offshore Malaysia during the nine months ended September 30, 2006.
Europe/Africa/Mediterranean. Operating revenue for our intermediate semisubmersibles working
in the Europe/Africa/Mediterranean regions increased $145.0 million in the first nine months of
2007 compared to the same period in 2006. Overall utilization during the nine months ended
September 30, 2007 increased primarily due to the relocation of the Ocean Lexington ($76.7 million)
from the GOM to offshore Egypt in the fourth quarter of 2006. Additionally, the Ocean Princess
generated additional revenues of $8.4 million during the nine months ended September 30, 2007
compared to the same period in 2006 when the rig had 48 days of downtime for an intermediate survey
and related repairs.
Average operating revenue per day for our other rigs in this market (excluding the Ocean
Lexington) increased from $141,500 during the first nine months of 2006 to $203,100 during the
first nine months of 2007 and contributed $64.8 million in additional revenue during the period
ended September 30, 2007 as compared to the same period in 2006. The overall increase in average
operating revenue per day in this market was primarily due to higher dayrates earned by the Ocean
Nomad, Ocean Guardian and Ocean Vanguard during the 2007 period.
Contract drilling expense for our intermediate semisubmersible rigs operating in the
Europe/Africa/Mediterranean markets increased $21.6 million during the first nine months of 2007
compared to the same period in 2006, primarily due to the inclusion of normal operating costs for
the Ocean Lexington ($19.1 million). The increase in operating expenses also reflects higher labor
and benefits costs incurred during the first nine months of 2007 for our rigs operating in the
North Sea and higher shorebase support costs. These costs were
partially offset by the absence of mobilization, inspection and related repair costs for the Ocean
Princess during the nine months ended September 30, 2007 that were associated with the rigs 2006
intermediate survey.
34
South America. Our intermediate semisubmersibles working offshore Brazil generated revenues
of $68.0 million in the first nine months of 2007 compared to revenues of $56.9 million for the
comparable period of 2006. The Ocean Whittington, which began operating in Brazil during the third
quarter of 2007, generated revenues of $6.8 million and incurred operating expenses of $7.1
million. Average operating revenue per day for the nine months ended September 30, 2007 was
$121,600 compared to $115,000 for the comparable period of 2006, resulting in a $3.3 million
increase in revenue between the periods.
Operating expenses for our operations offshore Brazil increased $15.7 million in the first
nine months of 2007, as compared to the same period in 2006, partially due to the inclusion of
normal operating and start-up costs for the Ocean Whittington. Other cost increases during the
first nine months of 2007 compared to the comparable period of 2006 include increased labor and
other personnel-related costs, shorebase support and freight costs, as well as higher repair and
maintenance costs.
Jack-Ups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Favorable/ |
|
|
2007 |
|
2006 |
|
(Unfavorable) |
|
|
(In thousands) |
JACK-UPS: |
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
194,283 |
|
|
$ |
245,877 |
|
|
$ |
(51,594 |
) |
Mexican GOM |
|
|
46,454 |
|
|
|
|
|
|
|
46,454 |
|
Australia/Asia/Middle East |
|
|
63,990 |
|
|
|
48,230 |
|
|
|
15,760 |
|
Europe/Africa/Mediterranean |
|
|
54,518 |
|
|
|
29,363 |
|
|
|
25,155 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
359,245 |
|
|
$ |
323,470 |
|
|
$ |
35,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
83,575 |
|
|
$ |
83,792 |
|
|
$ |
217 |
|
Mexican GOM |
|
|
11,738 |
|
|
|
|
|
|
|
(11,738 |
) |
Australia/Asia/Middle East |
|
|
21,538 |
|
|
|
19,128 |
|
|
|
(2,410 |
) |
Europe/Africa/Mediterranean |
|
|
14,218 |
|
|
|
10,303 |
|
|
|
(3,915 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
131,069 |
|
|
$ |
113,223 |
|
|
$ |
(17,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
228,176 |
|
|
$ |
210,247 |
|
|
$ |
17,929 |
|
|
|
|
GOM. Revenue generated by our jack-up rigs operating in the GOM decreased $51.6 million during
the first nine months of 2007 compared to the same period in 2006. The decline in revenues is
primarily due to the relocation of the Ocean King, which generated $28.8 million in GOM revenues
during the first nine months of 2006 compared to $13.3 million during the first nine months of 2007
prior to its mobilization, to Croatia during the third quarter of 2007, the Ocean Nugget, which
generated $11.9 million of revenues in the GOM market during the first nine months of 2006, to
Mexico in the fourth quarter of 2006 and the Ocean Spur, which generated $4.9 million of revenues
in the GOM market during the first nine months of 2006, to Tunisia in the first quarter of 2006.
In addition, average utilization (excluding the Ocean King, Ocean Nugget and Ocean Spur)
declined from 96% during the first nine months of 2006 to 87% during the comparable period in 2007
resulting in a reduction in revenues of $17.6 million. The decline in utilization was primarily in
response to market conditions in the GOM that caused the ready-stacking of certain of our jack-up
rigs for a portion of time between wells, scheduled downtime for the Ocean Crusaders survey and
contract preparation activities for the Ocean Columbia. The Ocean Columbia is expected to depart
the GOM and begin an 18-month contract in the Mexican GOM in the fourth quarter of 2007.
35
Contract drilling expense in the GOM was relatively unchanged for the first nine months of
2007 compared to the same period in 2006. The absence of operating costs in the GOM for the Ocean
Nugget and Ocean Spur during 2007 reduced operating expenses for the nine months ended September
30, 2007 by $13.1 million. The overall reduction in operating costs was partially offset by costs
associated with a survey and related repairs for the Ocean Crusader, contract preparation
activities for the Ocean Columbia, as well as increased repair and ready-stacking costs for the
Ocean Drake, Ocean Champion and Ocean Titan. In addition, operating costs for our rigs in this
market were negatively impacted by regular salary increases and promotions occurring in the first
nine months of 2007.
Mexican GOM. The Ocean Nugget, which began operating in the Mexican GOM in the fourth quarter
of 2006, generated $46.5 million in revenues during the first nine months of 2007 and incurred
contract drilling expenses of $11.7 million. We had no jack-up rigs operating in this market
during the comparable period of 2006.
Australia/Asia/Middle East. Our two jack-up rigs operating in the Australia/Asia/Middle East
regions generated revenues of $64.0 million during the first nine months of 2007 compared to $48.2
million for the same period in 2006. The $15.8 million increase in revenues was primarily due to
an increase in average operating revenue per day earned by our rigs in this region from $93,400
during the first nine months of 2006 to $120,200 for the comparable period of 2007, primarily due
to new contracts at higher dayrates for both the Ocean Heritage and Ocean Sovereign that began late
in the second and third quarters of 2006, respectively, as well as additional dayrate increases for
both rigs during the first nine months of 2007. Average utilization for our rigs in this region
increased from 94% during the nine months ended September 30, 2006 to 98% for the comparable period
in 2007 primarily due to increased utilization for the Ocean Sovereign in the first nine months of
2007, as compared to the same period of 2006 when the rig was out of service for a scheduled
inspection and related repairs. The increase in utilization for the nine months ended September
30, 2007 resulted in the generation of additional revenues of $1.3 million.
Contract drilling expenses increased $2.4 million to $21.5 million for the first nine months
of 2007 compared to the same period in 2006. The increase in operating costs for the nine months
ended September 30, 2007 is primarily attributable to higher labor and benefits expenses and
routine maintenance and other repair costs in the 2007 period, as compared to the first nine months
of 2006.
Europe/Africa/Mediterranean. Our jack-up rig, the Ocean Spur, began operating offshore
Tunisia in March 2006 and generated revenues of $29.4 million during the first nine months of 2006.
During the first nine months of 2007, the Ocean Spur generated revenues of $32.9 million operating
offshore Tunisia, including the recognition of a lump-sum demobilization fee of $7.9 million upon
completion of its contract. The rig subsequently mobilized to the Mediterranean Basin and began
operating offshore Egypt in late May 2007, generating additional revenues of $21.6 million during
the first nine months of 2007.
Operating expenses in this region increased $3.9 million during the first nine months of 2007
compared to the same period in 2006, primarily due to the inclusion of a full nine months of
operating costs in 2007 compared to only six and one-half months of expenses during the comparable
period of 2006.
Reimbursable expenses, net.
Revenues related to reimbursable items, offset by the related expenditures for these items,
were $6.7 million and $5.8 million for the nine months ended September 30, 2007 and 2006,
respectively. Reimbursable expenses include items that we purchase, and/or services we perform, at
the request of our customers. We charge our customers for purchases and/or services performed on
their behalf at cost, plus a mark-up where applicable. Therefore, net reimbursables fluctuate
based on customer requirements, which vary.
Depreciation.
Depreciation expense increased $22.7 million to $171.6 million for the nine months ended
September 30, 2007 compared to $148.9 million for the nine months ended September 30, 2006
primarily due to depreciation associated with capital additions in 2006 and the first nine months
of 2007, as well as higher depreciation expense for the Ocean Endeavor due to the completion of its
major upgrade in March 2007.
General and Administrative Expense.
We incurred general and administrative expense of $37.2 million in the first nine months of
2007 compared to $29.8 million for the same period in 2006. The $7.4 million increase in overhead
costs between the periods was
36
primarily due to an increase in payroll costs resulting from higher compensation and staffing
increases, legal fees, engineering consulting fees and miscellaneous office expenses.
Gain (Loss) on Disposition of Assets.
We recognized a net gain of $5.4 million on the sale and disposition of assets, net of
disposal costs, during the nine months ended September 30, 2007 compared to a net loss of $2.2
million during the same period of 2006. The gain recognized in 2007 primarily relates to the
recognition of gains on insurance settlements. The loss recognized in 2006 is primarily the result
of costs associated with the removal of production equipment from the Ocean Monarch, which was
subsequently sold to a third party.
Interest Expense.
We recorded interest expense for the first nine months of 2007 of $17.0 million, representing
a $1.7 million decrease in interest cost compared to the same period in 2006. This decrease was
primarily attributable to a greater amount of interest capitalized during the nine months ended
September 30, 2007 related to our qualifying rig upgrades and construction projects and lower
interest cost associated with our 1.5% Debentures. This decrease was partially offset by $8.9
million in debt issuance costs that we wrote off in the first nine months of 2007 in connection
with conversions of our 1.5% Debentures and our Zero Coupon Convertible Debentures due 2020, or
Zero Coupon Debentures, into shares of our common stock. See Liquidity and Capital Requirements
Debt Conversions.
Other Income and Expense (Other, net).
Included in Other, net are foreign currency translation adjustments and transaction gains
and losses and other income and expense items, among other things, which are not attributable to
our drilling operations. The components of Other, net fluctuate based on the level of activity,
as well as fluctuations in foreign currencies. We recorded other income, net, of $2.5 million
during the nine months ended September 30, 2007 and other income, net, of $6.6 million during the
same period of 2006.
During the nine months ended September 30, 2007 and 2006, we recognized net foreign currency
exchange gains of $2.4 million and $7.2 million, respectively.
Income Tax Expense.
Our net income tax expense or benefit is a function of the mix between our domestic and
international pre-tax earnings or losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Certain of our international rigs are owned or operated,
directly or indirectly, by Diamond Offshore International Limited, a Cayman Islands company which
is one of our wholly owned subsidiaries. Earnings from this subsidiary are reinvested
internationally and remittance to the U.S. is indefinitely postponed. Consequently, no U.S. tax
expense or benefits were recognized on these earnings or losses in 2007 or 2006.
We recognized income tax expense of $269.4 million on pre-tax income of $951.0 million during
the nine months ended September 30, 2007 compared to income tax expense of $186.4 million on
pre-tax income of $671.9 million for the same period in 2006. Income tax expense for the nine
months ended September 30, 2007 also included expense of $4.4 million related to 2006 return to
provision adjustments.
We adopted the provisions of Financial Accounting Standards Board, or FASB, Interpretation No.
48, Accounting for Uncertainty in Income Taxes, or FIN 48, on January 1, 2007. As a result of
the implementation of FIN 48, we recognized a long-term tax receivable of $2.6 million and a
long-term tax liability of $31.1 million for uncertain tax positions, the net of which was
accounted for as a reduction to the January 1, 2007 balance of retained earnings.
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 2000 to 2006. We are currently under audit in several of these jurisdictions
including an audit by the Internal Revenue Service of years 2004 and 2005.
The Brazilian tax authorities are auditing our income tax returns for the periods 2000 to
2005. We have received an initial audit report for tax year 2000 disallowing various deductions
claimed in the tax return. The tax auditors have issued an assessment for tax year 2000 of
approximately $1.5 million, including interest and penalty.
37
We have appealed the tax assessment and are awaiting the outcome of the appeal. We do not
anticipate that any adjustments resulting from the tax audit will have a material impact on our
consolidated results of operations, financial position or cash flows.
During the six months ended September 30, 2007, the holders of certain of our debentures
elected to convert them into shares of our common stock. See Liquidity and Capital Requirements
Debt Conversions and Note 7 Long-Term Debt to our consolidated financial statements included
in Item 1 of Part I of this report. As a result of conversions of our 1.5% Debentures, we reversed
a non-current deferred tax liability of $52.1 million which was accounted for as an increase to
Additional paid-in capital. The reversal related to interest expense imputed on these debentures
for U.S. federal income tax return purposes.
Sources of Liquidity and Capital Resources
Our principal sources of liquidity and capital resources are cash flows from our operations
and our cash reserves. We also may make use of our $285 million credit facility for cash
liquidity. See $285 Million Revolving Credit Facility. At September 30, 2007, we had $304.6
million in Cash and cash equivalents and $375.4 million in Marketable securities, representing
our investment of cash available for current operations.
Cash Flows from Operations. We operate in an industry that has been, and we expect to
continue to be, extremely competitive and highly cyclical. The dayrates we receive for our
drilling rigs and rig utilization rates are a function of rig supply and demand in the marketplace,
which is generally correlated with the price of oil and natural gas. Demand for drilling services
is dependent upon the level of expenditures by oil and gas companies for offshore exploration and
development, a variety of political and economic factors and availability of rigs in a particular
geographic region. As utilization rates increase, dayrates tend to increase as well reflecting the
lower supply of available rigs, and vice versa. These factors are not within our control and are
difficult to predict. For a description of other factors that could affect our cash flows from
operations, see Overview Industry Conditions and Forward-Looking Statements.
$285 Million Revolving Credit Facility. In November 2006, we entered into a $285 million
syndicated, five-year senior unsecured revolving credit facility, or Credit Facility, for general
corporate purposes, including loans and performance or standby letters of credit.
Loans under the Credit Facility bear interest at our option at a rate per annum equal to (i)
the higher of the prime rate or the federal funds rate plus 0.5% or (ii) the London Interbank
Offered Rate, or LIBOR, plus an applicable margin, varying from 0.20% to 0.525%, based on our
current credit ratings. Based on our current credit ratings at September 30, 2007, the applicable
margin on LIBOR loans would have been 0.24%. See Liquidity and Capital Requirements Credit
Ratings.
The Credit Facility contains customary covenants, including, but not limited to, the
maintenance of a ratio of consolidated indebtedness to total capitalization, as defined in the
Credit Facility, of not more than 60% at the end of each fiscal quarter and limitations on liens,
mergers, consolidations, liquidation and dissolution, changes in lines of business, swap
agreements, transactions with affiliates and subsidiary indebtedness.
As of September 30, 2007 and December 31, 2006, there were no loans outstanding under the
Credit Facility; however, $79.0 million in letters of credit were issued under the Credit Facility
during the first nine months of 2007.
Shelf Registration. We have the ability to issue an aggregate of approximately $117.5 million
in debt, equity and other securities under a shelf registration statement. In addition, from time
to time we may issue up to eight million shares of common stock which are registered under an
acquisition shelf registration statement, after giving effect to the two-for-one stock split we
declared in July 1997, in connection with one or more acquisitions by us of securities or assets of
other businesses.
Liquidity and Capital Requirements
Our liquidity and capital requirements are primarily a function of our working capital needs,
capital expenditures and debt service requirements. We determine the amount of cash required to
meet our capital commitments by evaluating the need to upgrade rigs to meet specific customer
requirements and by evaluating our ongoing rig equipment replacement and enhancement programs,
including water depth and drilling capability upgrades. We believe that our operating cash flows
and cash reserves will be sufficient to meet these capital commitments; however, we will continue
to make periodic assessments based on industry conditions. In addition,
38
we may, from time to time, issue debt or equity securities, or a combination thereof, or utilize
borrowings under our Credit Facility to finance capital expenditures, the acquisition of assets and
businesses or for general corporate purposes. Our ability to effect any such issuance of debt
and/or equity securities will be dependent on our results of operations, our current financial
condition, current market conditions and other factors beyond our control.
We believe that we have the financial resources needed to meet our business requirements in
the foreseeable future, including capital expenditures for rig upgrades and enhancements, as well
as our working capital requirements. We anticipate that we will rely primarily on internally
generated cash flows to maintain liquidity. From time to time, we may also make use of our Credit
Facility for cash liquidity.
Debt Conversions.
Our 1.5% Debentures and our Zero Coupon Debentures are convertible into shares of our common
stock. The 1.5% Debentures are convertible into shares of our common stock at a rate of 20.3978
shares per $1,000 principal amount of the 1.5% Debentures, or $49.02 per share, subject to
adjustment in certain circumstances. The Zero Coupon Debentures are convertible into shares of our
common stock at a fixed conversion rate of 8.6075 shares of common stock per $1,000 principal
amount at maturity of Zero Coupon Debentures, subject to adjustments in certain events. Upon
conversion of the 1.5% Debentures we have the right to deliver cash in lieu of shares of our common
stock.
During the first nine months of 2007, the holders of $450.5 million in aggregate principal
amount of our 1.5% Debentures and the holders of $1.5 million accreted, or carrying, value through
the date of conversion of our Zero Coupon Debentures elected to convert their outstanding
debentures into shares of our common stock. We issued 9,210,809 shares of our common stock
pursuant to these conversions during the first nine months of 2007. The aggregate principal amount
at maturity of our Zero Coupon Debentures converted during the nine months ended September 30, 2007
was $2.4 million.
As of September 30, 2007, approximately $9.4 million principal amount of our 1.5% Debentures
and $3.9 million aggregate accreted, or carrying, value ($6.0 million in aggregate principal amount
at maturity) of our Zero Coupon Debentures remained outstanding. The cash requirements for the
interest payable to holders of our 1.5% Debentures will decrease due to the reduction in the
outstanding principal amount.
Purchase Obligations Related to Rig Construction/Modifications.
Purchase Obligations. As of September 30, 2007, we had purchase obligations aggregating
approximately $243 million related to the major upgrade of the Ocean Monarch and construction of
two new jack-up rigs, the Ocean Scepter and Ocean Shield. We anticipate that expenditures related
to these shipyard projects will be approximately $50 million and $193 million for the remainder of
2007 and in 2008, respectively. However, the actual timing of these expenditures will vary based
on the completion of various construction milestones and the timing of the delivery of equipment,
which are beyond our control.
We had no other purchase obligations for major rig upgrades or any other significant purchase
obligations at September 30, 2007, except for those related to our direct rig operations, which
arise during the normal course of business.
Letters of Credit.
We are contingently liable as of September 30, 2007 in the aggregate amount of $196.0 million
under certain performance, bid, supersedeas and custom bonds and letters of credit, including $79.0
million in letters of credit issued under our Credit Facility. Agreements relating to
approximately $109.0 million of performance bonds can require collateral at any time. As of
September 30, 2007, 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.
Credit Ratings.
In June 2007, Moodys Investors Services upgraded our credit rating to Baa1 from Baa2. Our
current credit rating remains A- for Standard & Poors. Although our long-term ratings continue at
investment grade levels, lower ratings would result in higher interest rates for borrowings under
our Credit Facility and could also result in higher interest rates on future debt issuances.
39
Capital Expenditures.
Through September 30, 2007, we have spent an aggregate of $386.0 million in connection with
the major upgrades of the Ocean Endeavor and Ocean Monarch. We estimate that we will spend
approximately an additional $46 million on these two projects during the remainder of 2007.
Modifications to the Ocean Monarch commenced during the summer of 2006, and we expect completion of
the project in late 2008. The Ocean Endeavor arrived in the GOM late in the second quarter of 2007
and commenced drilling operations in early July 2007 under a four-year contract.
Our two high-performance, premium jack-up rigs, the Ocean Scepter and the Ocean Shield, are
currently under construction in Brownsville, Texas and in Singapore, respectively. We expect the
aggregate capitalized cost for the construction of these new units, including drill pipe and
capitalized interest, to be approximately $320 million, of which we have spent $241.6 million
through September 30, 2007. We expect to spend an additional approximately $4 million during the
remainder of 2007 on these two construction projects. We expect delivery of the Ocean Shield late
in the first quarter of 2008 and the Ocean Scepter to be completed during the second quarter of
2008.
During the first nine months of 2007, we spent approximately $228 million on our continuing
rig capital maintenance program (other than major upgrades, modifications pursuant to drilling
contracts and new construction) and to meet other corporate capital expenditure requirements. We
expect to spend approximately an additional $97 million during the remainder of 2007 associated
with our ongoing rig equipment replacement and enhancement programs. We expect to finance our 2007
capital expenditures through the use of our existing cash balances or internally generated funds.
From time to time, however, we may also make use of our Credit Facility for cash liquidity.
Rig Modifications.
In addition to anticipated capital spending for rig upgrades, new construction and in
connection with our rig capital maintenance program, we have committed to spend approximately $156
million towards the modification of six of our intermediate semisubmersible rigs in connection with
their upcoming contracts in Brazil and Mexico, of which we have spent $13.9 million through
September 30, 2007. These modifications are required to meet contract specifications for each of
the drilling rigs. We expect to spend approximately $66 million and $76 million on these contract
modification projects during the remainder of 2007 and during 2008, respectively.
Off-Balance Sheet Arrangements.
At September 30, 2007 and December 31, 2006, we had no off-balance sheet debt or other
arrangements.
Historical Cash Flows
The following is a discussion of our historical cash flows from operating, investing and
financing activities for the quarters ended September 30, 2007 and 2006.
Net Cash Provided by Operating Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2007 |
|
2006 |
|
Change |
|
|
(In thousands) |
Net income |
|
$ |
681,600 |
|
|
$ |
485,492 |
|
|
$ |
196,108 |
|
Net changes in operating assets and liabilities |
|
|
22,071 |
|
|
|
(117,613 |
) |
|
|
139,684 |
|
Loss on sale of marketable securities |
|
|
(1,755 |
) |
|
|
53 |
|
|
|
(1,808 |
) |
Depreciation and other non-cash items, net |
|
|
171,577 |
|
|
|
168,206 |
|
|
|
3,371 |
|
|
|
|
|
|
$ |
873,493 |
|
|
$ |
536,138 |
|
|
$ |
337,355 |
|
|
|
|
Our cash flows from operations in the first nine months of 2007 increased $337.4 million or
63% over cash generated by our operating activities in the first nine months of 2006. The increase
in cash flows from operations in the first nine months of 2007 is primarily the result of higher
average dayrates earned by our offshore drilling units as a result of an increase in worldwide
demand for offshore contract drilling services. This favorable trend on cash flows was augmented
by a decrease in cash required to satisfy our working capital requirements, primarily due to a
decrease in our trade accounts receivable, as a result of payments received from our customers. We
also received
40
$49.6 million in insurance proceeds during the first nine months of 2007 related to the settlement
of certain claims arising from the 2005 hurricanes (total insurance proceeds of $54.5 million were
received of which $4.9 million is included in net cash used in investing activities). Trade and
other receivables generated cash of $24.9 million during the first nine months of 2007 as the
billing cycle was completed compared to a $91.1 million usage of cash during the comparable period
of 2006. During the nine months ended September 30, 2007, we made estimated U.S. federal income
tax payments of $224.0 million and remitted foreign income taxes, net of refunds, of $27.5 million.
Net Cash Used in Investing Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2007 |
|
2006 |
|
Change |
|
|
(In thousands) |
Purchase of marketable securities |
|
$ |
(2,377,377 |
) |
|
$ |
(1,727,185 |
) |
|
$ |
(650,192 |
) |
Proceeds from sale of marketable securities |
|
|
2,314,111 |
|
|
|
1,638,092 |
|
|
|
676,019 |
|
Capital expenditures |
|
|
(451,331 |
) |
|
|
(367,718 |
) |
|
|
(83,613 |
) |
Proceeds from disposition of assets, net of
disposal costs |
|
|
7,658 |
|
|
|
(349 |
) |
|
|
8,007 |
|
Proceeds from settlement of forward contracts |
|
|
4,889 |
|
|
|
4,517 |
|
|
|
372 |
|
|
|
|
|
|
$ |
(502,050 |
) |
|
$ |
(452,643 |
) |
|
$ |
(49,407 |
) |
|
|
|
Our investing activities used a net $502.0 million during the first nine months of 2007
compared to using $452.6 million during the comparable period of 2006. During the first nine
months of 2007, we purchased marketable securities, net of sales, of $63.3 million compared to net
purchases of $89.1 million during the nine months ended September 30, 2006. Our level of
investment activity is dependent on our working capital and other capital requirements during the
year, as well as a response to actual or anticipated events or conditions in the securities
markets.
During the first nine months of 2007, we spent approximately $209.1 million related to the
major upgrades of the Ocean Endeavor and Ocean Monarch and construction of our two new jack-up
drilling rigs in addition to $242.2 million related to our ongoing capital maintenance program and
rig modifications to meet contractual requirements. During the first nine months of 2006, we spent
$209.1 million in connection with long-term construction projects and an additional $158.6 million
on projects associated with our ongoing capital maintenance program. See Liquidity and Capital
Requirements Capital Expenditures.
As of September 30, 2007, we had foreign currency forward exchange contracts outstanding,
which aggregated $36.6 million, that require us to purchase the equivalent of $11.0 million in
Australian dollars, $8.7 million in Brazilian reais, $5.0 million in British pounds sterling, $6.3
million in Mexican pesos and $5.6 million in Norwegian kroner at various times through January
2008. We expect to settle an aggregate of $33.3 million in 2007 and the remaining $3.3 million in
2008.
Net Cash Used in Financing Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2007 |
|
2006 |
|
Change |
|
|
(In thousands) |
Payment of quarterly and special dividends |
|
$ |
(605,316 |
) |
|
$ |
(242,006 |
) |
|
$ |
(363,310 |
) |
Proceeds from stock options exercised |
|
|
9,522 |
|
|
|
2,944 |
|
|
|
6,578 |
|
Other |
|
|
4,280 |
|
|
|
1,156 |
|
|
|
3,124 |
|
|
|
|
|
|
$ |
(591,514 |
) |
|
$ |
(237,906 |
) |
|
$ |
(353,608 |
) |
|
|
|
During the first nine months of 2007, we paid cash dividends totaling $605.3 million
(consisting of quarterly cash dividends aggregating $51.9 million, or $0.125 per share of our
common stock per quarter, and a special cash dividend of $4.00 per share of our common stock,
totaling $553.4 million). During the first nine months of 2006, we paid cash dividends totaling
$242.0 million (consisting of quarterly cash dividends aggregating $48.4 million, or $0.125 per
share of our common stock per quarter, and a special cash dividend of $1.50 per share of our common
stock, totaling $193.6 million).
In the fourth quarter of 2007, our Board of Directors adopted a policy of considering paying
special cash dividends, in amounts to be determined, on a quarterly basis, rather than annually.
On October 22, 2007, we
41
declared a special cash dividend of $1.25 per share of common stock and a regular quarterly cash
dividend of $0.125 per share of our common stock. Both dividends are payable on December 3, 2007
to stockholders of record on November 2, 2007. Our Board of Directors may, in subsequent quarters,
consider paying additional special cash dividends and/or regular quarterly cash dividends, in
amounts to be determined, if it believes that our financial position, earnings, earnings outlook,
capital spending plans and other relevant factors warrant such action at that time.
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. During the nine months ended September 30, 2007 and 2006, we did
not repurchase any shares of our outstanding common stock.
Other
Currency Risk. Some of our subsidiaries conduct a portion of their operations in the local
currency of the country where they conduct operations. Foreign countries in which we have
significant business operations include Mexico, Brazil, the U.K., Australia and Malaysia. When
possible, we attempt to minimize our currency exchange risk by seeking international contracts
payable in local currency in amounts equal to our estimated operating costs payable in local
currency with the balance of the contract payable in U.S. dollars. At present, however, only a
limited number of our contracts are payable both in U.S. dollars and the local currency.
We also utilize foreign exchange forward contracts to reduce our forward exchange risk. A
forward currency exchange contract obligates a contract holder to exchange predetermined amounts of
specified foreign currencies at specified foreign exchange rates on specific dates.
We record currency translation adjustments and transaction gains and losses as Other income
(expense) in our Consolidated Statements of Operations. The effect on our results of operations
from these translation adjustments and transaction gains and losses has not been material and we do
not expect them to have a significant effect in the future.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, or SFAS 159, which provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. Generally accepted accounting principles
in the U.S., or GAAP, have required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. The objective of SFAS 159 is to
help mitigate this type of volatility in the earnings by enabling companies to report related
assets and liabilities at fair value, which would likely reduce the need for companies to comply
with complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We have completed our evaluation of the impact of applying SFAS 159 on our
financial statements and have determined that the adoption of SFAS 159 will not have a material
impact on our consolidated results of operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which
establishes a separate framework for measuring fair value in GAAP, and expands disclosures about
fair value measurements. SFAS 157 was issued to eliminate the diversity in practice that exists
due to the different definitions of fair value and the limited guidance for applying those
definitions in GAAP that are dispersed among the many accounting pronouncements that require fair
value measurements. SFAS 157 does not require any new fair value measurements; however, its
adoption may result in changes to current practice. Changes resulting from the application of SFAS
157 relate to the definition of fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based
measurement, rather than an entity-specific measurement. It also establishes a fair value
hierarchy that distinguishes between (i) market participant assumptions developed based on market
data obtained from independent sources and (ii) the reporting entitys own assumptions about market
participant assumptions developed based on the best information available under the circumstances.
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007, including interim periods within those fiscal years. Earlier application is encouraged,
provided that the reporting entity has not yet issued financial statements for that fiscal year,
including interim periods. We have completed our evaluation of the impact of applying SFAS 157 on
our financial statements and have determined that the adoption of SFAS 157 will not have a material
impact on our consolidated results of operations, financial position or cash flows.
42
Forward-Looking Statements
We or our representatives may, from time to time, 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. 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:
|
|
|
future market conditions and the effect of such conditions on our future results of
operations (see Overview Industry Conditions); |
|
|
|
|
future uses of and requirements for financial resources (see Sources of Liquidity
and Capital Resources and Liquidity and Capital Requirements); |
|
|
|
|
interest rate and foreign exchange risk (see Liquidity and Capital Requirements
Credit Ratings, Other and Quantitative and Qualitative Disclosures About Market
Risk); |
|
|
|
|
future contractual obligations (see OverviewIndustry Conditions and Liquidity
and Capital Requirements); |
|
|
|
|
future operations outside the United States including, without limitation, our
operations in Mexico (see Overview Industry Conditions); |
|
|
|
|
business strategy; |
|
|
|
|
growth opportunities; |
|
|
|
|
competitive position; |
|
|
|
|
expected financial position; |
|
|
|
|
future cash flows (see Overview Contract Drilling Backlog); |
|
|
|
|
future regular or special dividends (see Historical Cash Flows); |
|
|
|
|
financing plans; |
|
|
|
|
tax planning; |
|
|
|
|
budgets for capital and other expenditures (see Liquidity and Capital
Requirements); |
|
|
|
|
timing and cost of completion of rig upgrades and other capital projects (see
Liquidity and Capital Requirements); |
|
|
|
|
delivery dates and drilling contracts related to rig construction and upgrade
projects (see Liquidity and Capital Requirements); |
|
|
|
|
plans and objectives of management; |
|
|
|
|
performance of contracts (see Overview Industry Conditions); |
|
|
|
|
outcomes of legal proceedings; |
|
|
|
|
compliance with applicable laws; and |
|
|
|
|
adequacy of insurance or indemnification (see OverviewGeneral) . |
These types of statements inherently are subject to a variety of assumptions, risks and
uncertainties 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:
|
|
|
general economic and business conditions; |
|
|
|
|
worldwide demand for oil and natural gas; |
|
|
|
|
changes in foreign and domestic oil and gas exploration, development and production
activity; |
|
|
|
|
oil and natural gas price fluctuations and related market expectations; |
|
|
|
|
the ability of the Organization of Petroleum Exporting Countries, commonly called
OPEC, to set and maintain production levels and pricing, and the level of production in
non-OPEC countries; |
|
|
|
|
policies of the various governments regarding exploration and development of oil and
gas reserves; |
|
|
|
|
advances in exploration and development technology; |
|
|
|
|
the political environment of oil-producing regions; |
|
|
|
|
casualty losses; |
|
|
|
|
operating hazards inherent in drilling for oil and gas offshore; |
|
|
|
|
industry fleet capacity; |
43
|
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market conditions in the offshore contract drilling industry, including dayrates and
utilization levels; |
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competition; |
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changes in foreign, political, social and economic conditions; |
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risks of international operations, compliance with foreign laws and taxation
policies and expropriation or nationalization of equipment and assets; |
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risks of potential contractual liabilities pursuant to our various drilling
contracts in effect from time to time; |
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the risk that an LOI may not result in a definitive agreement; |
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foreign exchange and currency fluctuations and regulations, and the inability to
repatriate income or capital; |
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risks of war, military operations, other armed hostilities, terrorist acts and
embargoes; |
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changes in offshore drilling technology, which could require significant capital
expenditures in order to maintain competitiveness; |
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regulatory initiatives and compliance with governmental regulations; |
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compliance with environmental laws and regulations; |
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customer preferences; |
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effects of litigation; |
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cost, availability and adequacy of insurance; |
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the risk that future regular or special dividends may not be declared; |
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adequacy of our sources of liquidity; |
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the availability of qualified personnel to operate and service our drilling rigs;
and |
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various other matters, many of which are beyond our control. |
The risks and uncertainties included here are not exhaustive. Other sections of this report
and our other filings with the Securities and Exchange Commission 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 with regard to the
statement or any change in events, conditions or circumstances on which any forward-looking
statement is based.
44
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
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 Managements 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, 2007 and December 31, 2006 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 which
may occur.
Exposure to market risk is managed and monitored by 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.
Interest Rate Risk
We have exposure to interest rate risks 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, 2007 and December 31, 2006, 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 of 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.
Loans under our $285 million syndicated, five-year senior unsecured revolving Credit Facility
bear interest at our option at a rate per annum equal to (i) the higher of the prime rate or the
federal funds rate plus 0.5% or (ii) the London Interbank Offered Rate, or LIBOR, plus an
applicable margin, varying from 0.20% to 0.525%, based on our current credit ratings. As of
September 30, 2007 and December 31, 2006, there were no loans outstanding under the Credit Facility
(however, $79.0 million in letters of credit were issued under the Credit Facility during the first
nine months of 2007).
Our long-term debt, as of September 30, 2007 and December 31, 2006, is denominated in U.S.
dollars. Our debt has been primarily 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 $39.3 million and $270.8 million as
of September 30, 2007 and December 31, 2006, respectively. A 100 basis point decrease would result
in an increase in market value of $1.7 million and $33.0 million as of September 30, 2007 and
December 31, 2006, respectively.
45
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes in foreign currency exchange
rates will impact the value of financial instruments. We entered into various forward exchange
contracts during 2006 and in the first nine months of 2007 requiring us to purchase predetermined
amounts of foreign currencies at predetermined rates. As of September 30, 2007, we had foreign
currency forward exchange contracts outstanding, which aggregated $36.6 million, that require us to
purchase the equivalent of $11.0 million in Australian dollars, $8.7 million in Brazilian reais,
$5.0 million in British pounds sterling, $6.3 million in Mexican pesos and $5.6 million in
Norwegian kroner at various times through January 2008.
These forward exchange contracts were included in Prepaid expenses and other in our
Consolidated Balance Sheets at September 30, 2007 at fair value in accordance with SFAS No. 133,
Accounting for Derivatives and Hedging Activities.
The sensitivity analysis below assumes an instantaneous 20% change in foreign currency
exchange rates versus the U.S. dollar from their levels at September 30, 2007 and December 31,
2006.
The following table presents our market risk by category (interest rates and foreign currency
exchange rates):
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Fair Value Asset (Liability) |
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Market Risk |
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September 30, |
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December 31, |
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September 30, |
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December 31, |
Category of risk exposure: |
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2007 |
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2006 |
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2007 |
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2006 |
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|
(In thousands) |
Interest rate: |
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Marketable securities |
|
$ |
375,394 |
(a) |
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$ |
301,159 |
(a) |
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$ |
500 |
(c) |
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$ |
400 |
(c) |
Long-term debt |
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(499,952 |
) (b) |
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(1,231,689 |
) (b) |
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Foreign Exchange: |
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Forward exchange contracts |
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2,600 |
(d) |
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2,600 |
(d) |
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11,000 |
(d) |
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7,400 |
(d) |
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(a) |
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The fair market value of our investment in marketable securities, excluding repurchase
agreements, is based on the quoted closing market prices on September 30, 2007 and December 31,
2006. |
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(b) |
|
The fair values of our 4.875% Senior Notes Due July 1, 2015, 5.15% Senior Notes Due
September 1, 2014, 1.5% Debentures and Zero Coupon Debentures are based on the quoted closing
market prices on September 30, 2007 and December 31, 2006. |
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(c) |
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The calculation of estimated market risk exposure is based on assumed adverse changes in
the underlying reference price or index of an increase in interest rates of 100 basis points at
September 30, 2007 and December 31, 2006. |
|
(d) |
|
The calculation of estimated foreign exchange risk is based on assumed adverse changes in
the underlying reference price or index of an increase in foreign exchange rates of 20% at
September 30, 2007 and December 31, 2006. |
ITEM 4. Controls and Procedures.
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, 2007. Based on their
participation in that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of September 30, 2007.
There was no change in our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) that occurred during the third fiscal quarter of 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
46
PART II. OTHER INFORMATION
ITEM 6. Exhibits.
See the Exhibit Index for a list of those exhibits filed or furnished herewith.
47
SIGNATURES
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.
|
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DIAMOND OFFSHORE DRILLING, INC.
(Registrant)
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Date October 30, 2007 |
By: |
\s\ Gary T. Krenek
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Gary T. Krenek |
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Senior Vice President and Chief Financial Officer |
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Date October 30, 2007 |
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\s\ Beth G. Gordon
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Beth G. Gordon
Controller (Chief Accounting Officer)
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48
EXHIBIT INDEX
|
|
|
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). |
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|
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3.2
|
|
Amended and Restated By-Laws (as amended through October 22, 2007) of Diamond Offshore
Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K
filed October 26, 2007) |
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10.1*
|
|
Second Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan, as amended. |
|
|
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31.1*
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
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31.2*
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
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32.1*
|
|
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
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* |
|
Filed or furnished herewith. |
49