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| DO > SEC Filings for DO > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-2009
Quarterly Report
longer contract duration and higher prices. Two of our five jack-up rigs in the
GOM are under contract. To reduce costs, the remaining three mat rigs have been
stacked and are not being actively marketed. Absent a sustained improvement in
natural gas prices, weakness in the GOM is likely to continue in 2009, with the
possibility of additional rigs being cold-stacked by the industry in an effort
to help bring equipment supply and demand into equilibrium. The number of
working jack-ups in the GOM remains near its lowest level since the early
1970's.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of October 22,
2009, February 5, 2009 (the date reported in our Annual Report on Form 10-K for
the year ended December 31, 2008), and October 23, 2008 (the date reported in
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). The
2008 period includes both firm commitments (typically represented by signed
contracts), as well as previously-disclosed letters of intent, or LOIs, where
indicated. An LOI is subject to customary conditions, including the execution of
a definitive agreement, and as such may not result in a binding contract.
Contract drilling backlog is calculated by multiplying the contracted operating
dayrate by the firm contract period and adding one-half of any potential rig
performance bonuses. Our calculation also assumes full utilization of our
drilling equipment for the contract period (excluding scheduled shipyard and
survey days); however, the amount of actual revenue earned and the actual
periods during which revenues are earned will be different than the amounts and
periods shown in the tables below due to various factors. Utilization rates,
which generally approach 95-98% during contracted periods, can be adversely
impacted by downtime due to various operating factors including, but not limited
to, weather conditions and unscheduled repairs and maintenance. Contract
drilling backlog excludes revenues for mobilization, demobilization, contract
preparation and customer reimbursables. No revenue is generally earned during
periods of downtime for regulatory surveys. Changes in our contract drilling
backlog between periods are a function of the performance of work on term
contracts, as well as the extension or modification of existing term contracts
and the execution of additional contracts.
October 22, February 5, October 23,
2009(1) 2009 2008(2)
(In thousands)
Contract Drilling Backlog
High-Specification Floaters $ 4,450,000 $ 4,346,000 $ 4,720,000
Intermediate Semisubmersibles 4,061,000 5,567,000 6,302,000
Jack-ups 249,000 346,000 428,000
Total $ 8,760,000 $ 10,259,000 $ 11,450,000
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(1) Contract drilling backlog as of October 22, 2009 included an aggregate $124.1 million in contract drilling revenue related to future work for one of our high-specification floaters for which a definitive agreement has not yet been executed.
(2) Contract drilling backlog as of October 23, 2008 included an aggregate $189.8 million in contract drilling revenue related to anticipated future work under an LOI expected to be earned by one of our high-specification floaters during 2009 and 2010.
The following table reflects the amount of our contract drilling backlog by year as of October 22, 2009.
For the Years Ending December 31,
Total 2009(1) 2010 2011 2012 - 2016
(In thousands)
Contract Drilling Backlog
High-Specification Floaters(2) $ 4,450,000 $ 380,000 $ 1,522,000 $ 1,182,000 $ 1,366,000
Intermediate Semisubmersibles 4,061,000 396,000 1,325,000 893,000 1,447,000
Jack-ups 249,000 85,000 136,000 28,000 -
Total $ 8,760,000 $ 861,000 $ 2,983,000 $ 2,103,000 $ 2,813,000
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(1) Represents a three-month period beginning October 1, 2009.
(2) Contract drilling backlog included an $118.7 million and $5.4 million in contract drilling revenue related to future work in 2010 and 2011, respectively, for which a definitive agreement has not yet been executed.
The following table reflects the percentage of rig days committed by year as of October 22, 2009. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet to total available days (number of rigs multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning date for the Ocean Valor.
For the Years Ending December 31,
2009(1) 2010 2011 2012 - 2016
Rig Days Committed (2)
High-Specification Floaters 91 % 82 % 54 % 13 %
Intermediate Semisubmersibles 87 % 70 % 48 % 15 %
Jack-ups 60 % 24 % 4 % -
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(1) Represents a three-month period beginning October 1, 2009.
(2) Includes approximately 274 and 517 scheduled shipyard, survey and mobilization days for 2009 and 2010, respectively.
General
The two most significant variables affecting revenues are dayrates for rigs
and rig utilization rates, each of which is a function of rig supply and demand
in the marketplace. 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.
Demand affects the number of days our fleet is utilized and the dayrates
earned. As utilization rates increase, dayrates tend to increase as well,
reflecting the lower supply of available rigs. Conversely, as utilization rates
decrease, dayrates tend to decrease as well, reflecting the excess supply of
rigs. When a rig is idle, no dayrate is earned and revenues will decrease as a
result. Revenues can also be affected as a result of the acquisition or disposal
of rigs, required surveys and shipyard upgrades. In order to improve utilization
or realize higher dayrates, we may mobilize our rigs from one market to another.
However, during periods of mobilization, revenues may be adversely affected. As
a response to changes in demand, we may withdraw a rig from the market by
stacking it or may reactivate a rig stacked previously, which may decrease or
increase revenues, respectively.
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.
Costs to repair and maintain our equipment fluctuate depending upon the type
of activity the drilling unit is performing, as well as the age and condition of
the equipment and the regions in which our rigs are working.
Operating expenses generally are not affected by changes in dayrates, and
short-term reductions in utilization do not necessarily result in lower
operating expenses. For instance, if a rig is to be idle for a short period of
time, few decreases in operating expenses may actually occur since the rig is
typically maintained in a prepared or "ready-stacked" state with a full crew. In
addition, when a rig is idle, we are responsible for certain operating expenses
such as rig fuel and supply boat costs, which are typically costs of the
operator when a rig is under contract. However, if the rig is to be idle for an
extended period of time, we may reduce the size of a rig's crew and take steps
to "cold stack" the rig, which lowers expenses and partially offsets the impact
on operating income. We recognize, as incurred, operating expenses related to
activities such as inspections, painting projects and routine overhauls that
meet certain criteria and which maintain rather than upgrade our rigs. These
expenses vary from period to period. Costs of rig enhancements are capitalized
and depreciated over the expected useful lives of the enhancements. Higher
depreciation expense decreases operating income in periods subsequent to capital
upgrades.
Our operating income is negatively impacted when we perform certain
regulatory inspections, which we refer to as a 5-year survey, or special survey,
that are due every five years for each of our rigs. Operating revenue decreases
because these surveys are performed during scheduled downtime in a shipyard.
Operating expenses increase as a result of these surveys due to the cost to
mobilize the rigs to a shipyard, inspection costs incurred and repair and
maintenance costs. Repair and maintenance costs may be required resulting from
the survey or may have been previously planned to take place during this
mandatory downtime. The number of rigs undergoing a 5-year survey will vary from
year to year, as well as from quarter to quarter.
In addition, operating income may be negatively impacted by intermediate
surveys, which are performed at interim periods between 5-year surveys.
Intermediate surveys are generally less extensive in duration and scope than a
5-year survey. Although an intermediate survey may require some downtime for the
drilling rig, it normally does not require dry-docking or shipyard time, except
for rigs located in the U.K. and Norwegian sectors of the North Sea.
During the remainder of 2009, we currently expect to spend approximately 235
rig days for 5-year and intermediate surveys, the mobilization of rigs,
contractually required modifications for international contracts and extended
maintenance projects. We can provide no assurance as to the exact timing and/or
duration of downtime associated with regulatory inspections, planned rig
mobilizations and other shipyard projects. See " -Contract Drilling Backlog."
We have elected to self-insure for physical damage to rigs and equipment
caused by named windstorms in the U.S. Gulf of Mexico. If named windstorms in
the U.S. Gulf of Mexico cause significant damage to our rigs, it could have a
material adverse effect on our financial position, results of operations and
cash flows. However, under our insurance policy that expires on May 1, 2010, we
continue to carry physical damage insurance for certain losses other than those
caused by named windstorms in the U.S. Gulf of Mexico, for which our deductible
for physical damage is $25.0 million per occurrence.
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, 2008. There
were no material changes to these policies during the nine months ended
September 30, 2009.
Results of Operations
Although we perform contract drilling services with different types of
drilling rigs and in many geographic locations, there is a similarity of
economic characteristics among all our divisions and locations, including the
nature of services provided and the type of customers for our services. We
believe that the combination of our drilling rigs into one reportable segment is
the appropriate aggregation in accordance with FASB Accounting Standards
Codification, or ASC, Topic 280, Segment Reporting (previously Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information"). However, for purposes of this discussion
and analysis of our results of operations, we provide greater detail with
respect to the types of rigs in our fleet and the geographic regions in which
they operate to enhance the reader's understanding of our financial condition,
changes in financial condition and results of operations.
Three Months Ended September 30, 2009 and 2008
Comparative data relating to our revenue and operating expenses by equipment
type are listed below.
Three Months Ended
September 30, Favorable/
2009 2008 (Unfavorable)
(In thousands)
CONTRACT DRILLING REVENUE
High-Specification Floaters $ 353,318 $ 344,024 $ 9,294
Intermediate Semisubmersibles 421,145 401,891 19,254
Jack-ups 110,818 136,038 (25,220 )
Total Contract Drilling Revenue $ 885,281 $ 881,953 $ 3,328
Revenues Related to Reimbursable Expenses $ 23,094 $ 18,423 $ 4,671
CONTRACT DRILLING EXPENSE
High-Specification Floaters $ 103,258 $ 94,713 $ (8,545 )
Intermediate Semisubmersibles 142,156 162,011 19,855
Jack-ups 52,559 58,159 5,600
Other 6,173 (610 ) (6,783 )
Total Contract Drilling Expense $ 304,146 $ 314,273 $ 10,127
Reimbursable Expenses $ 22,873 $ 18,126 $ (4,747 )
OPERATING INCOME
High-Specification Floaters $ 250,060 $ 249,311 $ 749
Intermediate Semisubmersibles 278,989 239,880 39,109
Jack-ups 58,259 77,879 (19,620 )
Other (6,173 ) 610 (6,783 )
Reimbursable expenses, net 221 297 (76 )
Depreciation (86,485 ) (72,155 ) (14,330 )
General and administrative expense (15,628 ) (13,944 ) (1,684 )
Casualty loss - (6,281 ) 6,281
Gain on disposition of assets 217 228 (11 )
Total Operating Income $ 479,460 $ 475,825 $ 3,635
Other income (expense):
Interest income 1,879 3,055 (1,176 )
Interest expense (14,031 ) (2,989 ) (11,042 )
Foreign currency transaction gain (loss) 8,313 (29,047 ) 37,360
Other, net (336 ) 581 (917 )
Income before income tax expense 475,285 447,425 27,860
Income tax expense (111,151 ) (136,892 ) 25,741
NET INCOME $ 364,134 $ 310,533 $ 53,601
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During the third quarter of 2009, the global economic recession continued to impact our industry, resulting in reduced demand for energy and volatile crude oil prices. Aggregate revenues for the third quarter of 2009 increased $3.3 million, or less than 1%, compared to the third quarter of 2008. Floater revenues increased $28.5 million due to the inclusion of a full quarter of operating revenues for our recently upgraded Ocean Monarch. However, this
increase in revenues was partially offset by a $25.2 million decrease in
revenues generated by our jack-up fleet compared to the third quarter of 2008.
The decreased contribution by our jack-up fleet was primarily due to the
cold-stacking of three of our mat-supported jack-up rigs in the GOM and the
absence of revenues from the Ocean Tower, which was taken out of service in
September 2008 as a result of damages sustained in Hurricane Ike in
September 2008.
Total contract drilling expense decreased $10.1 million, or 3%, during the
third quarter of 2009 compared to the same period in 2008. The net decrease in
operating cost for the three months ended September 30, 2009 reflects overall
lower survey and related costs compared to the prior year period, partially
offset by the inclusion of normal operating costs for the recently upgraded
Ocean Monarch and our new jack-ups Ocean Shield and Ocean Scepter, and contract
preparation.
Depreciation expense increased $14.3 million to $86.5 million during the
third quarter of 2009, or 20% compared to the third quarter of 2008, due to a
higher depreciable asset base.
High-Specification Floaters.
Three Months Ended
September 30, Favorable/
2009 2008 (Unfavorable)
(In thousands)
HIGH-SPECIFICATION FLOATERS:
CONTRACT DRILLING REVENUE
GOM $ 237,635 $ 269,599 $ (31,964 )
Australia/Asia/Middle East 40,936 13,712 27,224
Europe/Africa/Mediterranean 10,499 - 10,499
South America 64,248 60,713 3,535
Total Contract Drilling Revenue $ 353,318 $ 344,024 $ 9,294
CONTRACT DRILLING EXPENSE
GOM $ 60,116 $ 59,557 $ (559 )
Australia/Asia/Middle East 8,203 10,702 2,499
Europe/Africa/Mediterranean 3,008 - (3,008 )
South America 31,931 24,454 (7,477 )
Total Contract Drilling Expense $ 103,258 $ 94,713 $ (8,545 )
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GOM. Revenues generated by our high-specification floaters operating in the
GOM decreased $32.0 million during the third quarter of 2009 compared to the
same period in 2008. Comparing the quarters ended September 30, 2009 and 2008,
we had a net decrease of one high-specification semisubmersible rig in the GOM
with the relocation of the Ocean Quest to Brazil (late first quarter 2009) and
Ocean Valiant to Angola (early third quarter 2009) and the commencement of
drilling service of the Ocean Monarch in the GOM (late first quarter 2009). The
effect of these rig relocations was a net $3.7 million reduction in revenues in
the third quarter of 2009 compared to the same period in 2008.
Excluding the effect of the rig relocations discussed above, average
utilization for our high-specification rigs operating in the GOM decreased from
98% in the third quarter of 2008 to 80%, primarily due to the Ocean Star being
ready-stacked for the entire third quarter of 2009. The decrease in average
utilization resulted in a $42.6 million reduction in revenues in the third
quarter of 2009 compared to the same period of 2008. Excluding the Ocean
Monarch, Ocean Quest and Ocean Valiant, average operating revenue per day for
our high-specification floaters in this market increased to $444,500 during the
third quarter of 2009 compared to $436,500 in the third quarter of 2008,
resulting in additional revenues of $14.3 million.
Total operating costs during the third quarter of 2009 for our
high-specification floaters in the GOM remained constant compared to the prior
year quarter. Increased costs associated with normal operations of the Ocean
Monarch in the GOM and the ready-stacking of the Ocean Star during the third
quarter of 2009 were mostly offset by decreased operating costs for the Ocean
Quest and Ocean Valiant as a result of their departures from the GOM.
Australia/Asia/Middle East. During the third quarter of 2009, the Ocean
Rover, our high-specification rig operating offshore Malaysia, generated
$27.2 million in additional revenues compared to the third quarter of 2008.
The increase in revenues is primarily due to the nearly full utilization of the
rig during the third quarter of 2009, compared to 52 days of downtime for a
special survey during the 2008 quarter ($17.6 million), and an increase in the
average operating dayrate from $345,000 earned during the third quarter of 2008
to $451,200 during the third quarter of 2009 ($9.6 million).
Operating costs during the third quarter of 2009 decreased $2.5 million over
the third quarter of the prior year, due primarily to the absence of costs
associated with the rig's special survey in 2008.
Europe/Africa/Mediterranean. The Ocean Valiant mobilized from the GOM to the
Europe/Africa/Mediterranean region during the third quarter of 2009. The rig
began operating offshore Angola in mid-September 2009 and generated revenues of
$10.5 million and incurred normal operating costs of $3.0 million.
South America. Revenues earned by our high-specification floaters operating
. . .
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