Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Rowan’s drilling operating results for the first six months of 2004 were considerably enhanced by our North Sea drilling contract for Rowan Gorilla VII. The contract, under which operations began in June 2003, specified an 18-month minimum term, provided Rowan with a day rate tied to an average oil price and contained options for up to an additional 42 months of work. In March 2004, due to declining oil production caused by well bore and geological difficulties encountered in the first three wells, we agreed, in an attempt to extend the field’s economic life, to reduce the day rate under the contract for a five-month period through June 30, 2004. We also agreed at that time to defer receipt of day rate charges for the January through March 2004 period until an existing well could be recompleted and production resumed. Our agreement to temporarily reduce the day rate has been extended through August 31, 2004, and we are currently discussing terms for the remainder of the contract. We have recei ved payment of the day rate charges for January 2004 in accordance with the extension agreement, though our current balance of receivables related to this contract is $16.9 million. The drilling of an additional well currently under consideration could extend the productive life of the Ardmore Field into 2005. However, there is a risk that the contract could terminate earlier if oil production from the field again declines to an inadequate level. In either case, we could be faced with a write-off of receivables. Ultimately, Rowan is dependent upon the productive life of the Ardmore Field for payment of its compensation

Though considerably less volatile than our drilling and aviation operations, our manufacturing operations, especially the equipment group, had, for a number of years, been adversely impacted by a prolonged period of unfavorable world commodity prices, especially those for copper, iron ore, coal and gold. Over the past year, prices for many commodities have increased due to growing worldwide industrial demand. Rowan’s external manufacturing backlog has grown in recent months, and we are optimistic that a recovery in the demand for mining equipment may be underway. We cannot, however, accurately predict whether or not any such recovery will be sustained beyond the near term.

As part of Rowan’s ongoing review of its lines of businesses, the Board of Directors has requested that management determine the value of our aviation operations in the open market. We are going through that process currently and the Board of Directors has not made any final determination as to whether or not our aviation operations will be sold.

Capital expenditures during the first half of 2004 were primarily related to the construction of the first two Tarzan Class jack-up rigs, the Scooter Yeargain and the Bob Keller. The Tarzan Class was designed specifically for deep drilling in water depths up to 300 feet on the outer continental shelf in the Gulf of Mexico, offering drilling capabilities similar to our Super Gorilla class jack-ups, but with reduced environmental criteria (wind, wave and current) and at less than one-half the construction cost.

The Scooter Yeargain was delivered on April 29, 2004. We financed $91.2 million of the cost of the Scooter Yeargain through a 15-year bank loan guaranteed by the U. S. Department of Transportation’s Maritime Administration (“MARAD”) under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on November 10, 2004, and the Scooter Yeargain secures the government guarantee. At June 30, 2004, we had the full $91.2 million outstanding under this loan, which bore interest at an annual rate of about 1.42%.

The Bob Keller is being constructed at Vicksburg, Mississippi with delivery expected during the third quarter of 2005. We are financing up to $89.7 million of the cost of the Bob Keller through a 15-year bank loan guaranteed by MARAD under its Title XI Program. The loan requires semiannual interest payments in each May and November, with semiannual principal repayments commencing on May 10, 2005, and the Bob Keller secures the government guarantee. At June 30, 2004, we had borrowed about $28.2 million under this loan, which bore interest at an annual rate of about 1.42%.

Construction of two additional Tarzan Class jack-ups is tentatively planned, subject to current and anticipated market conditions, at an aggregate cost of around $200 million. We have applied to MARAD for Title XI government-guaranteed financing for up to $176 million of the cost of Tarzans III and IV on terms and conditions similar to those in effect for the first two Tarzan Class rigs. However, there can be no assurance that we will obtain such financing or that other outside financing or working capital will be available.

We have committed to purchase three Sikorsky S-92 helicopters for the deepwater drilling market, subject to our obtaining long-term operating contracts. The S-92 design features a 19-passenger capacity and a range of 475 nautical miles. We currently expect the helicopters to be available in the first half of 2005 and that their total cost, estimated to approach $50 million, will be funded from existing working capital or outside financing. However, there can be no assurance that we will obtain suitable operating contracts, that working capital will be adequate or that outside financing will be available.

 

Rowan currently estimates that remaining 2004 capital expenditures will be between $55 million and $65 million, including approximately $28-30 million towards the construction of the Bob Keller.

Rowan’s debt agreements contain provisions that require minimum levels of working capital and stockholders’ equity, limit the amount of long-term debt and, in the event of noncompliance, restrict investment activities, asset purchases and sales, lease obligations, borrowings and mergers or acquisitions. We believe that the Company was in compliance with each of its debt covenants at June 30, 2004.

During the 2001-2003 period, Rowan contributed about $47 million to our defined benefit pension plans. Such contribution amounts are determined based upon actuarial calculations of pension assets and liabilities that involve, among other things, assumptions about long-term asset returns and discount rates. Similar calculations were used to estimate pension costs and obligations as reflected in our consolidated financial statements, which showed an accumulated other comprehensive loss resulting from unfunded pension liabilities of $54.7 million at June 30, 2004. We currently estimate that our 2004 pension costs will increase by about $4.2 million or 19% over 2003, and expect to contribute approximately $20 million to our pension plans in 2004, most of which should occur during the third quarter.

Rowan uses the intrinsic value method of accounting for stock-based employee compensation pursuant to Accounting Principles Board Opinion No. 25. We estimate that use of the fair value method outlined by Statement of Financial Accounting Standards Nos. 123 and 148 would have reduced reported amounts of net income and net income per share by approximately $1.9 million or $.02 per share for each of the six month periods ended June 30, 2004 and 2003.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed into law on December 8, 2003 (the “Act”), introduced a prescription drug benefit under Medicare (Part D) and a federal subsidy to sponsors of retiree healthcare plans that provide benefits at least actuarially equivalent to Part D. We are currently evaluating our post-65 drug coverage to determine whether or not it is actuarially equivalent to Part D. We will recognize any effects of the Act on our plan benefit obligations and benefits costs pursuant to Financial Accounting Standards Board Staff Position No. FAS 106-2.

 

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