Table of Contents
|
UNITED STATES
|
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 |
|
OR |
| 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 1-8097 |
|
ENSCO International Incorporated |
| DELAWARE (State or other jurisdiction of incorporation or organization) 500 North Akard Street Suite 4300 Dallas, Texas (Address of principal executive offices) |
76-0232579 (I.R.S. Employer Identification No.) 75201-3331 (Zip Code) |
|
|
|
|
| Title of each class Common Stock, par value $.10 |
Name of each exchange on which registered New York Stock Exchange |
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No The aggregate market value of the common stock (based upon the closing price on the New York Stock Exchange on June 30, 2004, of $29.10) of ENSCO International Incorporated held by nonaffiliates of the registrant at that date was approximately $3,123,049,000. As of February 21, 2005 there were 151,237,094 shares of the registrant's common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Company's definitive proxy statement to be filed under the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year ended December 31, 2004, are incorporated by reference into Part III hereof. Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Commission as part of this Form 10-K. |
|
|
|
|
TABLE OF CONTENTS |
|
| PART III | |
| ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 102 |
| ITEM 11. EXECUTIVE COMPENSATION | 103 |
|
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
103 |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 104 |
| ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES | 104 |
| PART IV | |
| ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 105 |
| SIGNATURES | 114 |
|
Table of Contents
|
|
FORWARD-LOOKING STATEMENTS
|
|
Table of Contents
|
|
Table of Contents
|
|
Table of Contents
|
|
5
Table of Contents
|
| 2004 | 2003 | 2002(1) | 2001 | 2000 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Rig utilization:(2) | |||||||||||
| Jackup rigs | |||||||||||
| North America | 84% | 86% | 87% | 82% | 99% | ||||||
| Europe/Africa | 82% | 93% | 81% | 88% | 59% | ||||||
| Asia Pacific | 82% | 82% | 78% | 96% | 73% | ||||||
| South America/Caribbean | 97% | 99% | 100% | -- | -- | ||||||
| Total jackup rigs | 84% | 86% | 84% | 86% | 85% | ||||||
| Semisubmersible rig - North America | 51% | 96% | 92% | 92% | 77% | ||||||
| Barge rig - Asia Pacific(3) | 100% | 99% | 40% | -- | -- | ||||||
| Barge rigs - South America/Caribbean | 15% | 20% | 17% | 34% | 33% | ||||||
| Platform rigs | 40% | 67% | 95% | 64% | 50% | ||||||
| Total | 73% | 78% | 75% | 75% | 72% | ||||||
| Average day rates:(4) | |||||||||||
| Jackup rigs | |||||||||||
| North America | $ | 42,006 | $ | 31,679 | $ | 26,939 | $ | 46,783 | $ | 34,982 | |
| Europe/Africa | 60,542 | 64,615 | 74,759 | 65,172 | 38,560 | ||||||
| Asia Pacific | 63,226 | 63,154 | 58,836 | 42,313 | 37,548 | ||||||
| South America/Caribbean | 87,529 | 86,381 | 77,223 | -- | -- | ||||||
| Total jackup rigs | 53,429 | 48,428 | 45,798 | 50,045 | 35,945 | ||||||
| Semisubmersible rig - North America | 123,988 | 188,335 | 185,655 | 180,146 | 173,905 | ||||||
| Barge rig - Asia Pacific(3) | 48,317 | 41,333 | 41,750 | -- | -- | ||||||
| Barge rigs - South America/Caribbean | 37,437 | 39,475 | 39,987 | 42,553 | 39,897 | ||||||
| Platform rigs | 29,401 | 26,124 | 25,852 | 27,751 | 24,713 | ||||||
| Total | $ | 53,416 | $ | 50,393 | $ | 48,128 | $ | 50,997 | $ | 35,806 | |
| (1) | Rig utilization and average day rates include the results of the five jackup rigs obtained in the Chiles acquisition from the August 7, 2002 acquisition date. |
| (2) | Utilization is the ratio of aggregate contract days divided by the number of days in the period. |
| (3) | The Company mobilized a barge rig from Venezuela to Indonesia that commenced a long-term contract in December 2002. |
| (4) | Average day rates are derived by dividing contract drilling revenue by the aggregate number of contract days, adjusted to exclude certain types of non-recurring reimbursable revenue and lump sum revenue and contract days associated with certain mobilizations, demobilizations, shipyard contracts and standby contracts. |
|
Table of Contents
|
|
7
Table of Contents
|
|
Industry conditions fluctuate in response to supply and demand forces. During industry upturns, the Company usually experiences higher utilization and day rates, and generally is able to negotiate more favorable contract terms. During industry downturns, the Company competes more aggressively for contracts and may accept less favorable commercial terms and contractual liability and indemnity provisions that do not offer the same level of protection against potential losses as can be obtained during industry upturns. Increased contractual liabilities may have an adverse effect on results of operations in connection with risks for which the Company is uninsured or underinsured. The Company's drilling contracts often are cancelable upon specific notice by the customer. Although contracts may require the customer to pay an early termination payment upon cancellation, such payment may not fully compensate for the loss of the contract. In periods of rapid market downturn, the Company's customers may not honor the terms of existing contracts, may terminate contracts or may seek to renegotiate contract rates and terms to conform with depressed market conditions. Furthermore, contracts customarily specify automatic termination or termination at the option of the customer in the event of a total loss of the drilling rig and often include provisions addressing termination rights or cessation of day rates if operations are suspended for extended periods by reason of excessive downtime for repairs, acts of God or other specified conditions. The Company's operating results may be adversely affected by early termination of contracts, contract renegotiations or cessation of day rates while operations are suspended. |
|
Table of Contents
|
|
Table of Contents
|
|
Table of Contents
|
|
Contract drilling and offshore oil and gas operations in general are subject to numerous risks, including the following: |
| • | Blowouts, fires, explosions and other loss of well control events causing damage to wells, reservoirs, production facilities and other properties and which may require drilling of relief wells; | |
• |
Craterings, punchthroughs or other events causing rigs to capsize, sink or otherwise incur significant damage; | |
• |
Extensive uncontrolled fires, oil spills, or other discharges of pollutants causing damage to the environment; | |
• |
Machinery breakdowns, equipment failures, personnel shortages, failure of subcontractors and vendors to perform or supply goods and services and other events causing the suspension or cancellation of drilling operations; | |
• |
Unionization or similar collective actions by the Company's employees or employees of subcontractors causing significant increases in operating costs; and | |
• |
Property damage resulting from collisions, groundings, other accidents and severe weather conditions. |
|
|
|
Table of Contents
|
|
The Company generally obtains contractual indemnification from its customers whereby such customers agree to protect and indemnify the Company to some degree for liabilities resulting from pollution and damage to the environment, damage to wells, reservoirs and other customer property, control of wild wells, drilling of relief wells and certain personnel injuries. The Company does not generally maintain business interruption or loss of hire insurance. The losses or liabilities resulting from uninsured or underinsured events, the failure of a customer to meet indemnification obligations or the failure of one or more of the Company's insurance providers to meet claim obligations could have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company's contracts generally protect it from certain losses sustained as a result of negligence. However, losses resulting from contracts that do not contain such protection could have a material adverse affect on the Company's financial position, results of operations and cash flows. Losses resulting from the Company's gross negligence or willful misconduct may not be protected contractually by specific provision or by application of law, and the Company's insurance may not provide adequate protection for such losses. The cost of many of the types of insurance coverage maintained by the Company has increased significantly during recent years. In addition, insurance market conditions have resulted in retention of additional risk by the Company, primarily through higher insurance deductibles. Very few insurance underwriters offer certain types of insurance coverage maintained by the Company, and there can be no assurance that any particular type of insurance coverage will continue to be available in the future, that the Company will not accept retention of additional risk through higher insurance deductibles or otherwise, or that the Company will be able to purchase its desired level of insurance coverage at commercially feasible rates. Terrorist acts or acts of war may cause damage to or disruption of the Company's customers, suppliers and subcontractors, its operations, its employees and its property and equipment, which could significantly impact the Company's financial position, results of operations and cash flows. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could create many economic and political uncertainties, including an impact on oil and gas exploration and development, which could adversely affect the Company's operations in ways that cannot be readily determined and which may not be covered by insurance. |
|
Table of Contents
|
|
Table of Contents
|
|
The following table sets forth certain information regarding the executive officers of the Company: |
| Name | Age | Position with the Company | ||
| Carl F. Thorne | 64 | Chairman of the Board and Chief Executive Officer | ||
| William S. Chadwick, Jr. | 57 | Senior Vice President - Operations | ||
| P. J. Saile | 52 | President - ENSCO Offshore International Company | ||
| J. W. Swent | 54 | Senior Vice President - Chief Financial Officer | ||
| Jon C. Cole | 52 | Senior Vice President - Business Development and Safety, Health, Environment | ||
| Richard A. LeBlanc | 54 | Vice President - Investor Relations | ||
| H. E. Malone, Jr. | 61 | Vice President - Finance | ||
| Paul Mars | 46 | Vice President - Engineering | ||
| Charles A. Mills | 55 | Vice President - Human Resources and Security | ||
| Cary A. Moomjian, Jr. | 57 | Vice President, General Counsel and Secretary | ||
| David A. Armour | 47 | Controller | ||
| Ramon Yi | 51 | Treasurer | ||
|
Table of Contents
|
|
Carl F. Thorne has been a Director of the Company since December 1986. He was elected President and Chief Executive Officer of the Company in May 1987, and was elected Chairman of the Board of Directors in November 1987. Mr. Thorne holds a Bachelor of Science Degree in Petroleum Engineering from The University of Texas at Austin and a Juris Doctorate Degree from Baylor University College of Law. William S. Chadwick, Jr. joined the Company in June 1987 and was elected to his present position of Senior Vice President - Operations effective May 2004. Prior to his current position, Mr. Chadwick served the Company as Senior Vice President, Member - Office of the President and Chief Operating Officer, Vice President - Administration and Secretary. Mr. Chadwick holds a Bachelor of Science Degree in Economics from the Wharton School of the University of Pennsylvania. P. J. Saile joined the Company in August 1987 and was elected to his present position of President of ENSCO Offshore International Company effective June 2002. Prior to his current position, Mr. Saile served the Company as Senior Vice President, Member - Office of the President and Chief Operating Officer, and as Vice President - Operations. Mr. Saile holds a Bachelor of Business Administration Degree from the University of Mississippi. J. W. Swent joined the Company in July 2003 and was elected to his present position of Senior Vice President and Chief Financial Officer effective July 28, 2003. Mr. Swent previously held various financial executive positions in the information technology, telecommunications and manufacturing industries, including Memorex Corporation and Nortel Networks. He served as Chief Financial Officer and Chief Executive Officer of Cyrix Corporation from 1996 to 1997 and Chief Financial Officer and Chief Executive Officer of American Pad and Paper Company from 1998 to 2000. Prior to joining the Company, Mr. Swent had served as Co-Founder and Managing Director of Amrita Holdings, LLC since 2001. He is a graduate of the University of California at Berkeley, where he received a Bachelor of Science Degree in Finance and Masters Degree in Business Administration. |
|
Table of Contents
|
|
Richard A. LeBlanc joined the Company in July 1989 as Manager of Finance. He assumed responsibilities for the investor relations function in March 1993, was elected Treasurer in May 1995 and Vice President - Corporate Finance, Investor Relations and Treasurer in May 2002. Mr. LeBlanc holds a Bachelor of Science Degree in Finance and a Master of Business Administration Degree, both from Louisiana State University. H. E. Malone, Jr. joined the Company in August 1987 and was elected Vice President - Finance effective May 2004. Prior to his current position, Mr. Malone served the Company as Vice President - Accounting, Tax and Information Systems, Vice President - Finance and Vice President - Controller. Mr. Malone holds Bachelor of Business Administration Degrees from The University of Texas at Austin and Southern Methodist University and a Master of Business Administration Degree from the University of North Texas. Paul Mars joined the Company in June 1998 and was elected Vice President - Engineering effective May 2003. Prior to this appointment, Mr. Mars served the Company as General Manager for the Europe and Africa Business Unit. Prior to joining the Company, Mr. Mars served in various capacities with Smedvig Offshore Limited and Transworld North Sea Drilling Services Limited. Mr. Mars holds a Bachelor of Science Honors Degree in Naval Architecture from the University of Newcastle upon Tyne, England. Charles A. Mills joined the company in June 2004 as Vice President of Human Resources and Security. He has over 27 years oil and gas industry experience in human resources and managerial positions most recently from 1989 - 2002 with Hunt Oil Company where he was Senior Vice President Human Resources and Corporate Services. Prior to 1989, Mr. Mills held a number of executive and management positions with Tenneco Oil E & P and Shell Oil Company. Mr. Mills holds a Bachelor of Science degree in Management from the University of West Florida. Cary A. Moomjian, Jr. joined the Company in January 2002 and thereupon was elected Vice President, General Counsel and Secretary. Mr. Moomjian has over twenty-five years of experience in the oil and gas industry. From 1976 to 2001, Mr. Moomjian served in various management and executive capacities as an employee of Santa Fe International Corporation, including Vice President, General Counsel and Secretary from 1993 to 2001. Mr. Moomjian holds a Bachelor of Arts Degree from Occidental College and a Juris Doctorate Degree from Duke University School of Law. |
|
Table of Contents
|
|
Ramon Yi joined the Company in August 2004 as Treasurer. Mr. Yi has over twenty-nine years of business experience in a variety of industries, most recently as Corporate Treasurer in the manufacturing and high tech sectors, including Sunrise Medical and Fresenius Medical Care, global manufacturers of durable medical equipment, and Symbios, Inc., a manufacturer of semiconductor chips. He was also Vice President for George E. Warren Corporation and Assistant Treasurer for Northeast Petroleum Corporation, both in the petroleum trading and marketing industry. Mr. Yi earned a Bachelor of Arts degree from Harvard University in 1975 and a Master of Business Administration in Finance and Accounting from Boston University. Officers each serve for a one-year term or until their successors are elected and qualified to serve. Mr. Thorne and Mr. Malone are brothers-in-law. |
|
Table of Contents
|
|
Item 2. Properties Contract Drilling The following table provides certain information about the Company's drilling rig fleet as of February 15, 2005: JACKUP RIGS |
| Rig Name | Year Built/ Rebuilt |
Rig Make | Maximum Water Depth/ Drilling Depth |
Current Location |
Current Customer | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
North America |
|||||||||||
| ENSCO 60 | 1981/2003 | Lev-111-C | 300'/25,000' | Gulf of Mexico | Taylor Energy | ||||||
| ENSCO 64 | 1973/2002 | MLT-53-S | 350'/30,000' | Gulf of Mexico | Shipyard(1) | ||||||
| ENSCO 68 | 1976/2004 | MLT-116-CE | 400'/30,000' | Gulf of Mexico | Pogo Producing | ||||||
| ENSCO 69 | 1976/1995 | MLT-84-S | 400'/25,000' | Gulf of Mexico | LLOG | ||||||
| ENSCO 74 | 1999 | MLT Super 116-C | 400'/30,000' | Gulf of Mexico | Spinnaker | ||||||
| ENSCO 75 | 1999 | MLT Super 116-C | 400'/30,000' | Gulf of Mexico | Devon Energy | ||||||
| ENSCO 76 | 2000 | MLT Super 116-C | 350'/30,000' | Gulf of Mexico | Committed(2) | ||||||
| ENSCO 81 | 1979/2003 | MLT-116-C | 350'/30,000' | Gulf of Mexico | BP | ||||||
| ENSCO 82 | 1979/2003 | MLT-116-C | 300'/30,000' | Gulf of Mexico | ChevronTexaco | ||||||
| ENSCO 83 | 1979 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | ExxonMobil | ||||||
| ENSCO 84 | 1981/2005 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | Shipyard | ||||||
| ENSCO 86 | 1981 | MLT-82 SD-C | 250'/30,000' | Gulf of Mexico | ExxonMobil | ||||||
| ENSCO 87 | 1982 | MLT-116-C | 350'/25,000' | Gulf of Mexico | Seneca | ||||||
| ENSCO 89 | 1982 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | LLOG | ||||||
| ENSCO 90 | 1982/2002 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | Santos | ||||||
| ENSCO 93 | 1982/2002 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | Hunt Oil | ||||||
| ENSCO 98 | 1977/2003 | MLT-82 SD-C | 250'/25,000' | Gulf of Mexico | Devon Energy | ||||||
| ENSCO 99 | 1985 | MLT-82 SD-C | 250'/30,000' | Gulf of Mexico | Shipyard | ||||||
| ENSCO 105 | 2002 | KFELS-MOD V-B | 400'/30,000' | Gulf of Mexico | Millennium | ||||||
| Europe/Africa | |||||||||||
| ENSCO 70 | 1981/1996 | Hitachi-K1032N | 250'/30,000' | Denmark | DONG | ||||||
| ENSCO 71 | 1982/1995 | Hitachi-K1032N | 225'/25,000' | Denmark | Maersk | ||||||
| ENSCO 72 | 1981/1996 | Hitachi-K1025N | 225'/25,000' | United Kingdom | ExxonMobil | ||||||
| ENSCO 80 | 1978/1995 | MLT-116-CE | 225'/30,000' | United Kingdom | ADTI/Newfield | ||||||
| ENSCO 85 | 1981/1995 | MLT-116-C | 225'/25,000' | United Kingdom | BHPB | ||||||
| ENSCO 92 | 1982/1996 | MLT-116-C | 225'/25,000' | United Kingdom | ConocoPhillips | ||||||
| ENSCO 100 | 1987/2000 | MLT-150-88-C | 350'/30,000' | Nigeria | ExxonMobil | ||||||
| ENSCO 101 | 2000 | KFELS-MOD V-A | 400'/30,000' | Denmark | ConocoPhillips | ||||||
| Asia Pacific | |||||||||||
| ENSCO 50 | 1983/1998 | FG-780II-C | 300'/25,000' | India | British Gas | ||||||
| ENSCO 51 | 1981/2002 | FG-780II-C | 300'/25,000' | Brunei | Shell | ||||||
| ENSCO 52 | 1983/1997 | FG-780II-C | 300'/25,000' | Malaysia | Petronas Carigali | ||||||
| ENSCO 53 | 1982/1998 | FG-780II-C | 300'/25,000' | Qatar | Ras Gas | ||||||
| ENSCO 54 | 1982/1997 | FG-780II-C | 300'/25,000' | Qatar | Ras Gas | ||||||
| ENSCO 56 | 1982/1997 | FG-780II-C | 300'/25,000' | Australia | ROC | ||||||
| ENSCO 57 | 1982/2003 | FG-780II-C | 300'/25,000' | Malaysia | Murphy | ||||||
| ENSCO 67 | 1976/1996 | MLT-116-CE | 400'/30,000' | Singapore | Shipyard | ||||||
| ENSCO 88 | 1982/2004 | MLT-82 SD-C | 250'/25,000' | Qatar | Ras Gas | ||||||
| ENSCO 94 | 1981/2001 | Hitachi-250-C | 250'/25,000' | Qatar | Ras Gas | ||||||
| ENSCO 95 | 1981/2005 | Hitachi-250-C | 250'/25,000' | Pakistan | PPL | ||||||
| ENSCO 96 | 1982/1997 | Hitachi-250-C | 250'/25,000' | Qatar | Ras Gas | ||||||
| ENSCO 97 | 1980/1997 | MLT-82 SD-C | 250'/25,000' | Qatar | QPD | ||||||
| ENSCO 102 | 2002 | KFELS-MOD V-A | 400'/30,000' | Australia | ExxonMobil | ||||||
| ENSCO 104 | 2002 | KFELS-MOD V-B | 400'/30,000' | East Timor | ConocoPhillips | ||||||
| ENSCO 106 | 2005 | KFELS-MOD V-B | 400'/30,000' | Australia | Apache(3) | ||||||
|
18 Table of Contents
|
| SEMISUBMERSIBLE RIG |
| Rig Name | Year Built |
Rig Make | Maximum Water Depth/ Drilling Depth |
Current Location |
Current Customer | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ENSCO 7500 | 2000 | Dynamically Positioned | 8,000'/30,000' | Gulf of Mexico | Dominion | ||||||
| BARGE RIGS | |||||||||||
| Rig Name | Year Built/ Rebuilt |
Maximum Drilling Depth |
Current Location |
Current Customer |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ENSCO I | 1999 | 30,000' | Indonesia | Total | |||||||
| ENSCO II | 1999 | 30,000' | Venezuela | Shell | |||||||
| ENSCO III | 1999 | 30,000' | Venezuela | ChevronTexaco | |||||||
| ENSCO XI | 1994 | 25,000' | Venezuela | Stacked(4) | |||||||
| ENSCO XII | 1994 | 25,000' | Venezuela | Available(4) | |||||||
| ENSCO XIV | 1994 | 25,000' | Venezuela | Stacked(4) | |||||||
| ENSCO XV | 1994 | 25,000' | Venezuela | Stacked(4) | |||||||
| PLATFORM RIGS | |||||||||||
| Rig Name | Year Built/ Rebuilt |
Maximum Drilling Depth |
Current Location |
Current Customer | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ENSCO 25 | 1980/1998 | 30,000' | Gulf of Mexico | ChevronTexaco(5) | |||||||
| ENSCO 26 | 1982/1999 | 30,000' | Gulf of Mexico | Available(4) | |||||||
| ENSCO 29 | 1981/1997 | 30,000' | Gulf of Mexico | Taylor | |||||||
| Notes: |
| (1) | ENSCO 64 is in a shipyard undergoing analysis of the
damage caused by Hurricane Ivan. (See Note 13 to the Company's consolidated financial statements
included in "Item 8. Financial Statements and Supplementary Data."). |
| (2) | ENSCO 76 is in a shipyard preparing for a three-year contract with Aramco that is scheduled to commence in June 2005 offshore Saudi Arabia. |
| (3) | Construction of ENSCO 106 was completed on February 7, 2005 in Singapore. The rig is currently under mobilization to perform a one-year contract for Apache that is scheduled to commence in March 2005 offshore Australia. |
| (4) | Rigs classified as available are being actively marketed and can commence work on short notice. Stacked rigs do not have operating crews immediately available and may require some recommissioning before commencing operations. |
| (5) | ENSCO 25 is currently undergoing repairs for damage sustained by Hurricane Ivan. The rig is currently receiving a standby rate and repairs are expected to be completed in late February 2005, at which time it will resume drilling operations for ChevronTexaco. |
|
19
Table of Contents
|
|
Jackup rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected leg supports. Jackup rigs are generally preferred over other rig types in water depths of 400 feet or less, primarily because jackup rigs provide a more stable drilling platform with above water blowout prevention equipment. All of the Company's jackup rigs are of the independent leg design. All but two of the Company's jackup units are equipped with cantilevers, which allow the drilling equipment to extend outward from their hulls over fixed platforms enabling drilling of both exploratory and development wells. The jackup rig hull supports the drilling equipment, jacking system, crew quarters, storage and loading facilities, helicopter landing pad and related equipment. A semisubmersible rig is a floating offshore drilling unit with pontoons and columns that, when flooded with water, cause the unit to be partially submerged to a predetermined depth. Semisubmersibles can be held in a fixed location over the ocean floor by being either anchored to the sea bottom with mooring chains or dynamically positioned by computer-controlled propellers, or "thrusters." The Company's semisubmersible rig, which is capable of drilling in water depths up to 8,000 feet, is a dynamically positioned rig, but it also can be adapted for moored operations. Barge rigs are towed to the drilling location and are held in place by anchors while drilling activities are conducted. The Company's barge rigs have all of the crew quarters, storage facilities and related equipment mounted on floating barges, with the drilling equipment cantilevered from the stern of the barge. Platform rigs are designed to be temporarily installed on permanently constructed customer offshore platforms. The platform rig sections are lifted onto the offshore platforms with heavy lift cranes. A platform rig typically remains at a location for a longer period of time than a jackup rig, because several wells can be drilled from a single offshore platform. Over the life of a typical rig, several of the major components are replaced due to normal wear and tear or due to technological advancements in drilling equipment. All of the Company's rigs are in good condition except for ENSCO 64, which incurred substantial damage as a result of Hurricane Ivan in September 2004. ENSCO 64 is currently in a shipyard where analysis of the damage is being performed by the Company and insurance underwriters. (See Note 13 to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data.") As of February 15, 2005, the Company owns all of the rigs in its fleet. |
|
Table of Contents
|
|
Table of Contents
|
|
Legislation known as the U.K. Working Time Directive was introduced in August 2003 and may be applicable to employees of the Company and other drilling contractors that work offshore in U.K. territorial waters or in the U.K. sector of the North Sea. Certain unions representing offshore employees have claimed that drilling contractors are not in compliance with the U.K. Working Time Directive in respect of paid time off (vacation time) for employees working offshore on a rotational basis (equal time working and off). Based on the information available at this time, the Company does not expect the resolution of this matter to have a material adverse effect on its financial position, results of operations or cash flows. The Company's jackup drilling rig ENSCO 64 sustained substantial damage during Hurricane Ivan in September 2004. Arbitration and civil litigation are pending in relation to a contract entered into with Titan Maritime LLC (the "contractor") relating to the salvage of the ENSCO 64 legs, major portions of which were imbedded in the sea floor in the aftermath of Hurricane Ivan. The disputes with the contractor arose following termination of the salvage contract by the Company due to various equipment breakdowns, inadequacies and asserted breaches of contract. The contractor seeks payment in full while the Company seeks recovery of unspecified monetary damages from the contractor in such amount as may be established during the proceedings. The Company believes it has meritorious claims against the contractor. The decisions to award the contract for the salvage, to terminate the contract, and pursue claims against the contractor were made with the consent and participation of the loss adjuster for the Company's insurance underwriters, and it is envisioned that any ultimate liability to the contractor or recovery from the contractor, including associated attorneys' fees, will be part and parcel of the Company's insurance claim arising out of the damage sustained to the ENSCO 64 during Hurricane Ivan. Accordingly, the ultimate resolution of the dispute is not anticipated to have any impact on the Company's results of operations. The contractor has invoiced an aggregate $17.1 million in connection with the terminated contract. The Company has paid the contractor $9.9 million and is withholding further payment pending resolution of disputes. |
|
Table of Contents
|
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Year | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 High | $30.79 | $29.16 | $33.15 | $34.15 | $34.15 | ||||||
| 2004 Low | $26.35 | $24.95 | $26.95 | $28.25 | $24.95 | ||||||
| 2003 High | $30.75 | $31.10 | $28.43 | $29.00 | $31.10 | ||||||
| 2003 Low | $24.24 | $24.32 | $23.58 | $24.49 | $23.58 | ||||||
|
The Company's common stock (Symbol: ESV) is traded on the New York Stock Exchange. At February 1, 2005, there were approximately 1,280 stockholders of record of the Company's common stock. The Company initiated the payment of a $.025 per share quarterly cash dividend on its common stock during the third quarter of 1997 and has continued to pay such quarterly dividends through December 31, 2004. Cash dividends totaling $.10 per share were paid in both 2004 and 2003. The Company currently intends to continue paying quarterly dividends for the foreseeable future. However, the final determination of the timing, amount and payment of dividends on the common stock is at the discretion of the Board of Directors and will depend on, among other things, the Company's profitability, liquidity, financial condition and capital requirements. |
|
Table of Contents
|
|
Following is a summary of all repurchases by the Company of its common stock during the three month period ended December 31, 2004: |
| Issuer Purchases of Equity Securities | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Number | Maximum | |||||||||||||
| of Shares | Number of | |||||||||||||
| Average | Purchased as | Shares that | ||||||||||||
| Total | Price | Part of Publicly | May Yet Be | |||||||||||
| Number of | Paid | Announced | Purchased | |||||||||||
| Shares | per | Plans or | Under Plans | |||||||||||
| Period | Purchased | Share | Programs | or Programs | ||||||||||
| October | -- | -- | -- | -- | ||||||||||
| November | 5,955 | $30.26 | -- | -- | ||||||||||
| December | 629 | $29.06 | -- | -- | ||||||||||
| Total | 6,584 | $30.15 | -- | -- | ||||||||||
| All of the shares repurchased during the three month period ended December 31, 2004 were surrendered by employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock grants. |
On February 21, 1995, the Board of Directors of the Company adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a "Right") for each share of the Company's common stock outstanding on March 6, 1995. Each Right initially entitled its holder to purchase 1/100th of a share of the Company's Series A Junior Participating Preferred Stock for $50.00, subject to adjustment. In March 1997, the plan was amended to increase the purchase price from $50.00 to $250.00. The Rights expired on February 21, 2005. |
|
Table of Contents
|
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 (1) | 2003 (2) | 2002 (3) | 2001 | 2000 | |||||||
| (in millions, except per share amounts) | |||||||||||
| Consolidated Statement of Income Data | |||||||||||
| Revenues | $ | 768.0 | $ | 781.2 | $ | 641.6 | $ | 731.0 | $ | 473.7 | |
| Operating expenses | |||||||||||
| Contract drilling | 425.5 | 445.2 | 341.5 | 309.3 | 249.5 | ||||||
| Depreciation and amortization | 144.1 | 130.2 | 112.0 | 103.6 | 88.4 | ||||||
| Impairment of assets | -- | -- | 59.9 | 9.2 | -- | ||||||
| General and administrative | 26.3 | 22.0 | 18.6 | 16.8 | 13.3 | ||||||
| Operating income | 172.1 | 183.8 | 109.6 | 292.1 | 122.5 | ||||||
| Other expense, net | (32.6 | ) | (31.6 | ) | (19.6 | ) | (25.4 | ) | (6.6 | ) | |
| Income from continuing operations before income taxes | 139.5 | 152.2 | 90.0 | 266.7 | 115.9 | ||||||
| Provision for income taxes | 36.0 | 43.1 | 28.8 | 75.1 | 36.6 | ||||||
| Income from continuing operations | 103.5 | 109.1 | 61.2 | 191.6 | 79.3 | ||||||
| Income (loss) from discontinued operations | (.7 | ) | (.8 | ) | (1.9 | ) | 15.7 | 6.1 | |||
| Net income | $ | 102.8 | $ | 108.3 | $ | 59.3 | $ | 207.3 | $ | 85.4 | |
| Earnings (loss) per share - basic | |||||||||||
| Continuing operations | $ | .69 | $ | .73 | $ | .43 | $ | 1.40 | $ | .58 | |
| Discontinued operations | (.01 | ) | (.01 | ) | (.01 | ) | .11 | .04 | |||
| $ | .68 | $ | .72 | $ | .42 | $ | 1.51 | $ | .62 | ||
| Earnings (loss) per share - diluted | |||||||||||
| Continuing operations | $ | .69 | $ | .73 | $ | .43 | $ | 1.39 | $ | .57 | |
| Discontinued operations | (.01 | ) | (.01 | ) | (.01 | ) | .11 | .04 | |||
| $ | .68 | $ | .72 | $ | .42 | $ | 1.50 | $ | .61 | ||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 150.5 | 149.6 | 140.7 | 136.9 | 137.6 | ||||||
| Diluted | 150.6 | 150.1 | 141.4 | 137.9 | 139.3 | ||||||
| Cash dividends per common share | $ | .10 | $ | .10 | $ | .10 | $ | .10 | $ | .10 | |
| Consolidated Balance Sheet Data | |||||||||||
| Working capital | $ | 277.9 | $ | 355.9 | $ | 189.2 | $ | 312.0 | $ | 171.6 | |
| Total assets | 3,322.0 | 3,183.0 | 3,061.5 | 2,323.8 | 2,108.0 | ||||||
| Long-term debt, net of current portion | 527.1 | 549.9 | 547.5 | 462.4 | 422.2 | ||||||
| Stockholders' equity | 2,181.9 | 2,081.1 | 1,967.0 | 1,440.2 | 1,328.9 | ||||||
| (1) | During 2004, the Company transferred three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) to a shipyard as partial payment for the construction of a new high performance premium jackup rig to be named ENSCO 107. The results of operations of ENSCO 23, ENSCO 24 and ENSCO 55 have been reclassified as discontinued operations for each of the years in the five-year period ended December 31, 2004. |
| (2) | During 2003, the Company sold its 27-vessel marine transportation fleet, which represented the entire marine transportation services segment previously reported by the Company. The results of operations of the marine transportation services segment have been reclassified as discontinued operations for each of the years in the four-year period ended December 31, 2003. |
| (3) | The Company acquired Chiles on August 7, 2002. Consolidated Statement of Income Data includes the results of Chiles from the acquisition date. |
|
25 Table of Contents |
| • | demand for oil and gas, | |
| • | regional and global economic conditions and expected changes therein, | |
| • | political and legislative environments in the U.S. and other major oil-producing countries, | |
| • | production levels and related activities of OPEC and other oil and gas producers, and | |
| • | the impact that these and other events have on the current and expected future pricing of oil and natural gas. |
|
The supply of drilling rigs is limited and new rigs require a substantial capital investment and a long period of time to construct. In addition, it is time consuming and costly to move rigs between markets. Accordingly, as demand changes in a particular market, the supply of rigs may not adjust quickly, and therefore the utilization and day rates of rigs could fluctuate significantly. Since factors that affect offshore exploration and development spending are beyond the control of the Company and rig demand can change quickly, it is difficult for the Company to predict industry conditions or trends in operating results. Periods of low demand result in excess rig supply, which generally reduces rig utilization levels and day rates; periods of high demand tighten rig supply, generally resulting in increased rig utilization levels and day rates. |
|
26
Table of Contents
|
|
27
Table of Contents
|
|
Table of Contents
|
|
|
| 2004 | 2003 | 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 768.0 | $ | 781.2 | $ | 641.6 | |||||
| Operating expenses | |||||||||||
| Contract drilling | 425.5 | 445.2 | 341.5 | ||||||||
| Depreciation and amortization | 144.1 | 130.2 | 112.0 | ||||||||
| Impairment of assets | -- | -- | 59.9 | ||||||||
| General and administrative | 26.3 | 22.0 | 18.6 | ||||||||
| Operating income | 172.1 | 183.8 | 109.6 | ||||||||
| Other expense, net | (32.6 | ) | (31.6 | ) | (19.6 | ) | |||||
| Provision for income taxes | 36.0 | 43.1 | 28.8 | ||||||||
| Income from continuing operations | 103.5 | 109.1 | 61.2 | ||||||||
| Loss from discontinued operations | (.7 | ) | (.8 | ) | (1.9 | ) | |||||
| Net income | $ | 102.8 | $ | 108.3 | $ | 59.3 | |||||
|
In 2004, net income for the Company decreased by $5.5 million, or 5%, and operating income decreased by $11.7 million, or 6%, as compared to 2003. These decreases are due primarily to reduced utilization and average day rates for the Europe/Africa jackup rigs and ENSCO 7500, partially offset by increased average day rates for the North America jackup rigs and increased operating days for the Asia Pacific jackup rigs. In 2003, net income for the Company increased by $49.0 million, or 83%, and operating income increased by $74.2 million, or 68%, as compared to 2002. These increases are due primarily to a $59.9 million impairment charge in 2002 relating to the Company's Venezuela-based assets and the addition of the five rigs obtained as part of the Chiles acquisition during the third quarter of 2002. Approximately $13.0 million of the $74.2 million increase in operating income is attributable to the five rigs acquired from Chiles. |
|
Table of Contents
|
|
Revenues and Contract Drilling Expense The following is an analysis of the Company's revenues and contract drilling expense for each of the years in the three-year period ended December 31, 2004 (in millions): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Revenues | |||||||
| Jackup rigs: | |||||||
| North America | $255.5 | $213.8 | $164.3 | ||||
| Europe/Africa | 146.0 | 179.7 | 180.6 | ||||
| Asia Pacific | 268.8 | 233.3 | 182.1 | ||||
| South America/Caribbean | 31.5 | 32.4 | 11.4 | ||||
| Total jackup rigs | 701.8 | 659.2 | 538.4 | ||||
| Semisubmersible rig - North America | 23.8 | 66.2 | 61.6 | ||||
| Barge rig - Asia Pacific | 18.0 | 19.5 | 2.5 | ||||
| Barge rigs - South America/Caribbean | 13.7 | 18.2 | 17.7 | ||||
| Platform rigs - North America | 10.7 | 18.1 | 21.4 | ||||
| Total | $768.0 | $781.2 | $641.6 | ||||
| Contract Drilling Expense | |||||||
| Jackup rigs: | |||||||
| North America | $137.4 | $145.1 | $121.6 | ||||
| Europe/Africa | 95.8 | 99.2 | 81.8 | ||||
| Asia Pacific | 136.2 | 134.1 | 81.4 | ||||
| South America/Caribbean | 12.5 | 13.3 | 5.3 | ||||
| Total jackup rigs | 381.9 | 391.7 | 290.1 | ||||
| Semisubmersible rig - North America | 15.8 | 19.4 | 21.6 | ||||
| Barge rig - Asia Pacific | 8.9 | 11.4 | 2.8 | ||||
| Barge rigs - South America/Caribbean | 10.2 | 11.8 | 13.7 | ||||
| Platform rigs - North America | 8.7 | 10.9 | 13.3 | ||||
| Total | $425.5 | $445.2 | $341.5 | ||||
|
Table of Contents
|
|
An analysis of rig utilization and average day rates for each of the years in the three-year period ended December 31, 2004, based on geographical location and type of rig, are included in "Item 1. Business - Key Performance Measures." The following is an analysis of the Company's offshore drilling rigs at December 31, 2004, 2003 and 2002: |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Jackup rigs: | |||||||
| North America(1)(2) | 18 | 21 | 21 | ||||
| Europe/Africa | 8 | 8 | 8 | ||||
| Asia Pacific(1) | 15 | 12 | 12 | ||||
| South America/Caribbean | 1 | 1 | 1 | ||||
| Total jackup rigs | 42 | 42 | 42 | ||||
| Semisubmersible rig - North America | 1 | 1 | 1 | ||||
| Barge rig - Asia Pacific | 1 | 1 | 1 | ||||
| Barge rigs - South America/Caribbean | 6 | 6 | 6 | ||||
| Platform rigs - North America(3) | 3 | 3 | 3 | ||||
| Total(4) | 53 | 53 | 53 | ||||
| (1) | During 2004, the Company mobilized one jackup rig from the Gulf of Mexico to a shipyard in Singapore and two jackup rigs from the Gulf of Mexico to a shipyard in the Middle East for enhancement procedures before being deployed in the Asia Pacific region. At December 31, 2004, the jackup rig in Singapore remains in the shipyard and will be available in May 2005. One of the jackup rigs in the Middle East commenced drilling operations in November 2004 in Qatar while the other commenced drilling operations in February 2005 in Pakistan. |
| (2) | Excludes the jackup rig ENSCO 55, which was operating in North America at December 31, 2003 and 2002 but was sold in connection with the execution of a rig construction agreement during the second quarter of 2004, and its operating results have been reclassified as discontinued operations. |
| (3) | Excludes the platform rigs ENSCO 23 and ENSCO 24, which were available for operations in North America at December 31, 2003 and 2002 but were sold in connection with the execution of a rig construction agreement during the second quarter 2004, and their operating results have been reclassified as discontinued operations. |
| (4) | The total number of rigs excludes ENSCO 106 and ENSCO 107. ENSCO 106, which was owned by a joint venture in which the Company held a 25% interest, was under construction at December 31, 2004 and was acquired by the Company in February 2005. ENSCO 107, which commenced construction during the first quarter of 2004, is expected to enter service in late 2005 or early 2006. |
|
31
Table of Contents
|
|
In 2004, revenues for the North America jackup rigs increased by $41.7 million, or 20%, and contract drilling expenses decreased by $7.7 million, or 5%, as compared to 2003. The increase in revenues is due primarily to a 33% increase in the average day rates, partially offset by decreased revenue attributable to the reduced size of the Company's North America jackup rig fleet in 2004 resulting from the relocation of three jackup rigs from the Gulf of Mexico. The significant increase in average day rates is primarily attributable to a reduction in supply of Gulf of Mexico jackup rigs resulting from the relocation of several rigs by the Company and its competitors to international markets in the latter half of 2003 and in 2004. Although supply and demand factors have improved, short-term contracts remain prevalent in the Gulf of Mexico jackup market, and it is not possible to determine whether the current increasing day rate trend will continue. The slight decrease in contract drilling expense is primarily attributable to the reduced size of the fleet in 2004 and reduced insurance costs, partially offset by $4.0 million of costs incurred in 2004 in connection with the termination of a rig transportation contract and related costs of assisting tugs and ancillary activities associated with the delayed relocation of two jackup rigs from the Gulf of Mexico to the Middle East and increased personnel costs. In 2003, revenues for the North America jackup rigs increased by $49.5 million, or 30%, and contract drilling expenses increased by $23.5 million, or 19%, as compared to 2002. The increases were due primarily to the addition of three rigs to the North America jackup rig fleet in the third quarter of 2002 as a result of the Chiles acquisition. During 2003, these three rigs generated an aggregate $42.7 million of revenues and $29.8 million of contract drilling expenses compared to an aggregate of $18.1 million of revenues and $9.3 million of contract drilling expenses for the last five months of 2002. Excluding the impact of the three additional rigs, revenues increased by $24.9 million, or 17%, and contract drilling expenses increased by $3.0 million, or 3%, as compared to 2002. The $24.9 million increase in revenues was primarily attributable to an 18% increase in average day rates, and to a lesser extent, increased mobilization revenue. The $3.0 million increase in contract drilling expenses was due primarily to increased mobilization and personnel costs, partially offset by the impact of decreased utilization. The majority of the average day rate improvement is attributable to increased day rates during the third and fourth quarters of 2003, which was driven primarily by a reduction in supply of Gulf of Mexico jackup rigs resulting from the relocation of certain rigs by the Company's competitors to international markets, increasing the demand and day rates for rigs remaining in the Gulf of Mexico. |
|
Table of Contents
|
|
In 2004, revenues for the Europe/Africa jackup rigs decreased by $33.7 million, or 19%, and contract drilling expenses decreased by $3.4 million, or 3%, as compared to 2003. The decrease in revenues is primarily attributable to a 6% decrease in the average day rates and a reduction in utilization to 82% in 2004 from 93% in 2003. The decrease in average day rates and utilization is due to market weakness in the North Sea that began during the latter part of 2003 and continued throughout 2004. Although there are indications that spending by oil and gas companies in the North Sea is beginning to increase, it is not possible to determine if this trend will continue or if demand for jackup rigs in the North Sea will improve. Contract drilling expense decreased from the prior year period primarily due to reduced repair and insurance costs as well as $900,000 of expenses associated with a crane failure during the prior year, partially offset by increased personnel costs. In 2003, revenues for the Europe/Africa jackup rigs decreased by $900,000 and contract drilling expenses increased by $17.4 million, or 21%, as compared to 2002. The decrease in revenues was primarily attributable to 14% decrease in average day rates partially offset by an increase in utilization to 93% in 2003 from 81% in 2002. The majority of the decrease in average day rates occurred during the third and fourth quarters of 2003 and resulted primarily from limited term work opportunities in the North Sea. The majority of the increase in utilization is attributable to a reduction in the amount of time rigs spent in shipyards undergoing enhancement, regulatory work and contract preparation, from 300 rig days in 2002 to 97 rig days in 2003. The increase in contract drilling expenses was due primarily to the impact of increased utilization and, to a lesser extent, the increased cost structure associated with ENSCO 100, which operated offshore Nigeria for twelve months in 2003 compared to only five months during 2002. Contract drilling expenses for ENSCO 100 run 20% to 30% higher in Nigeria as compared to the North Sea due to higher transportation, freight and shore base support costs. Asia Pacific Jackup Rigs
In 2004, revenues for the Asia Pacific jackup rigs increased by $35.5 million, or 15%, and contract drilling expenses increased by $2.1 million, or 2%, as compared to 2003. The increase in revenues is primarily due to improved utilization and increased revenues associated with reimbursed costs. The Company relocated three rigs to the Asia Pacific region during 2004, including two rigs undergoing enhancement procedures since arrival that remained in shipyards at year-end, and a third rig that commenced operations in November after completing enhancement procedures. Excluding the impact of these three rigs, utilization of the remaining 12 rigs in the Asia Pacific jackup rig fleet increased to 93% in 2004 from 82% in 2003. The improved utilization resulted from a reduction in the amount of time rigs spent in shipyards undergoing enhancements and contract preparation during 2004 compared to 2003. The increase in contract drilling expense is primarily attributable to $6.7 million of costs associated with the three rigs added to the Asia Pacific fleet in 2004, the impact of increased utilization of the remaining rigs in the fleet and increased mobilization and reimbursable expenses, partially offset by a $13.4 million decrease in costs associated with the ENSCO 102 joint venture charter operations, which ceased effective January 31, 2004 upon ENSCO's acquisition of the rig from the joint venture, and a decrease in insurance expense. |
|
33
Table of Contents
|
|
South America/Caribbean Jackup Rig In 2004, revenues for the South American/Caribbean jackup rig decreased by $900,000, or 3%, and contract drilling expenses decreased by $800,000, or 6%, as compared to 2003. The decrease in revenues is primarily due to a decrease in revenue associated with reimbursed costs. The decrease in contract drilling expense is due primarily to minor decreases in personnel, repair and maintenance, insurance and reimbursable expenses. In 2003, revenues for the South America/Caribbean jackup rig increased by $21.0 million, or 184%, and contract drilling expenses increased by $8.0 million, or 151%, as compared to 2002. The increases are due to a full year of contract operations in 2003 compared to 146 days of contract operations in 2002 as the jackup rig was acquired in connection with the Chiles acquisition on August 7, 2002. North America Semisubmersible Rig In 2004, revenues for ENSCO 7500 decreased by $42.4 million, or 64%, and contract drilling expenses decreased by $3.6 million, or 19%, as compared to 2003, as the rig completed an approximate three-year contract in the first quarter of 2004 and was idle approximately six months while completing minor improvements, regulatory inspection, maintenance and repair procedures during 2004. In 2003, revenues for ENSCO 7500 increased by $4.6 million, or 7%, and contract drilling expenses decreased by $2.2 million, or 10%, as compared to 2002. The increase in revenues was due primarily to an increase in utilization to 96% in 2003 from 92% in 2002 and to a lesser extent, a 1% increase in the average day rate. The rig experienced down time during 2002 to undergo hull repairs. The decrease in contract drilling expenses was due primarily to costs related to the aforementioned hull repairs incurred in 2002. |
|
Table of Contents
|
|
In 2004, revenues for the Asia Pacific barge rig decreased by $1.5 million, or 8%, and contract drilling expenses decreased by $2.5 million, or 22%, as compared to 2003. The decrease in revenues is primarily due to a $4.0 million decrease in revenues associated with mobilization and other customer reimbursements in 2003 relating to costs associated with initial contract operations, partially offset by a 17% increase in the average day rate of ENSCO I. The decrease in contract drilling expense is due primarily to a reduction in the aforementioned reimbursed costs. In 2003, revenues and contract drilling expenses for the Asia Pacific barge rig increased by $17.0 million and $8.6 million, respectively, as compared to 2002. The increases were due to a full year of contract operations in Indonesia during 2003 compared to 138 days of mobilization and shipyard activity in 2002, as ENSCO I was mobilized from Venezuela in August 2002 to a shipyard in Singapore for modifications and enhancements to fulfill a long-term contract in Indonesia. Shipyard modifications were completed, and contract operations commenced, in late December 2002. Substantially all of the $2.5 million of revenue for 2002 is attributable to the mobilization of the rig from Venezuela to the drilling location in Indonesia. South America/Caribbean Barge Rigs In 2004, revenues for the South America/Caribbean barge rigs decreased by $4.5 million, or 25%, and contract drilling expenses decreased by $1.6 million, or 14%, as compared to 2003. The decrease in revenues and contract drilling expense is due primarily to ENSCO II, which was idle 104 days during 2004, primarily for regulatory inspection and remedial procedures, but worked all of 2003. In 2003, revenues for the South America/Caribbean barge rigs increased by $500,000, or 3%, and contract drilling expenses decreased by $1.9 million, or 14%, as compared to 2002. The increase in revenues was due primarily to increased utilization of ENSCO III, which operated under a short-term contract at the end of 2003 and was idle during 2002, partially offset by reduced activity of ENSCO XII, which completed a contract and demobilized from Trinidad to Venezuela during 2002 and was idle during 2003. The decrease in contract drilling expenses was due primarily to reduced costs associated with ENSCO I, which was mobilized from Venezuela to Indonesia in August 2002, the termination of the ENSCO XII contract in 2002 and subsequent demobilization from Trinidad to Venezuela and the devaluation of the Venezuelan currency during the current year. North America Platform Rigs In 2004, revenues for the North America platform rigs decreased by $7.4 million, or 41%, and contract drilling expenses decreased by $2.2 million, or 20%, as compared to 2003. The decreases are due primarily to ENSCO 29, which operated at 89% utilization during 2003, but was idle in 2004 until the fourth quarter, when it began earning a standby rate while preparing for a long-term contract that commenced in February 2005. |
|
Table of Contents
|
|
Depreciation and Amortization Depreciation and amortization expense for 2004 increased by $13.9 million, or 11%, as compared to 2003. The increase is primarily attributable to depreciation on capital enhancement projects completed in 2004 and 2003 and depreciation on ENSCO 102, which was acquired in January 2004. Depreciation and amortization expense for 2003 increased by $18.2 million, or 16%, as compared to 2002. The increase was primarily attributable to the depreciation associated with the five rigs obtained in the Chiles acquisition in August 2002 and depreciation on capital enhancement projects completed in 2003 and 2002, partially offset by an approximate $3.8 million reduction in depreciation resulting from the Company's impairment of its barge rigs in Venezuela in the fourth quarter of 2002. Impairment of Assets The Company's South America/Caribbean barge rig fleet operations have historically been concentrated on Lake Maracaibo in Venezuela. Lake Maracaibo market conditions have been depressed for several years due to reduced or deferred exploration and development spending by Venezuela's national oil company, Petroleos de Venezuela, S.A. ("PdVSA"). In addition, the economic and political situation in Venezuela has become increasingly unstable during recent years. As a result of the uncertainty surrounding its South America/Caribbean barge rig fleet, the Company has evaluated the carrying value of the barge rigs for impairment on a regular basis during recent years. |
|
Table of Contents
|
|
General and Administrative General and administrative expense for 2004 increased by $4.3 million, or 20%, as compared to 2003. The increase is primarily attributable to increased personnel costs, audit fees and consulting services related to information systems, the Sarbanes-Oxley Act and other projects, offset in part by a decrease resulting from a $1.1 million payment of one-time severance costs during the first quarter of 2003 under an employment contract assumed in connection with the Chiles acquisition in 2002. General and administrative expense in 2003 increased by $3.4 million, or 18%, as compared 2002. The increase was primarily attributable to the payment in the first quarter of 2003 of one-time severance costs of $1.1 million under an employment contract assumed in connection with the Chiles acquisition, an increase in other personnel costs, an increase in insurance costs and an increase in professional fees related to the implementation of the Company's new accounting and procurement system. Other Income (Expense) Other income (expense) for each of the years in the three-year period ended December 31, 2004, is as follows (in millions): |
| 2004 | 2003 | 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest income | $ | 3.7 | $ | 3.4 | $ | 5.1 | |||||
| Interest expense, net: | |||||||||||
| Interest expense | (40.5 | ) | (38.7 | ) | (36.2 | ) | |||||
| Capitalized interest | 3.9 | 2.0 | 5.1 | ||||||||
| (36.6 | ) | (36.7 | ) | (31.1 | ) | ||||||
| Other, net | .3 | 1.7 | 6.4 | ||||||||
| $ | (32.6 | ) | $ | (31.6 | ) | $ | (19.6 | ) | |||
|
Table of Contents
|
|
Interest expense increased by $1.8 million in 2004, as compared to 2003, due primarily to a minor increase in average effective interest rates. Interest expense increased by $2.5 million in 2003, as compared to 2002 due primarily to the additional debt assumed in the Chiles acquisition in August 2002. Capitalized interest increased by $1.9 million in 2004, as compared to 2003, due to an increase in the amount invested in rig construction and enhancement projects, primarily the ENSCO 107 construction project and the enhancement projects associated with ENSCO 68, ENSCO 88 and ENSCO 67. Capitalized interest decreased by $3.1 million in 2003, as compared to 2002, due to a decrease in the amount invested in construction and enhancement projects, primarily the ENSCO 102 and the ENSCO 105 construction projects, which were completed in the third and fourth quarters of 2002, respectively. Other, net for 2004 consists primarily of a $3.9 million gain resulting from the settlement of an insurance claim related to ENSCO 7500 hull repairs and lost revenue in the first quarter of 2002 and net foreign currency translation gains of $2.0 million, partially offset by a $5.5 million loss for the insurance deductible related to damages sustained on ENSCO 64 and ENSCO 25 during Hurricane Ivan in the Gulf of Mexico. (See Note 13 to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data".) Other, net for 2003 consists primarily of a $3.0 million gain related to the receipt and sale of shares of common stock of Prudential Financial, Inc. The shares were issued to the Company as a result of the Company's previous purchase of a Group Annuity Contract upon termination of a predecessor consolidated pension plan and the conversion of Prudential Financial, Inc. from a mutual company to a stock company. Other net for 2003 also includes $900,000 in foreign currency translation losses and a loss of $300,000 related to the decline in fair value of certain treasury rate lock agreements obtained in connection with the Chiles acquisition. (See "Market Risk" for further information on the Chiles treasury rate lock agreements.) Other, net for 2002 includes a $5.8 million gain in connection with the settlement of an insurance claim related to the ENSCO 51, which sustained damage from a natural gas fire, and net gains resulting from changes in foreign currency exchange rates, partially offset by an $800,000 loss related to the decrease in fair value of certain treasury rate lock agreements obtained in connection with the Chiles acquisition. (See "Market Risk" for further information on the Chiles treasury rate lock agreements.) |
|
Table of Contents
|
|
In February 2004, the Company entered into an agreement with KFELS, a major international shipyard, to exchange three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) and $55.0 million for the construction of a new high performance premium jackup rig to be named ENSCO 107. The exchange of the three rigs occurred in May 2004 and was treated as a sale with no significant gain or loss recognized, as the fair value of the rigs approximated their book value of $39.9 million. The results of operations of the ENSCO 23, ENSCO 24 and ENSCO 55 have been reclassified as discontinued operations in the consolidated statements of income for each of the years in the three-year period ended December 31, 2004. In February 2003, the Company reached an agreement to sell its 27-vessel marine transportation fleet. After receipt of various regulatory consents, the transaction was finalized in April 2003 for approximately $79.0 million. The Company recognized a pre-tax gain of approximately $6.4 million related to the transaction. The operating results of the marine transportation fleet, which represent the entire marine transportation services segment previously reported by the Company, have been reclassified as discontinued operations in the consolidated statements of income for each of the years in the two-year period ended December 31, 2003. Following is a summary of loss from discontinued operations for each of the years in the three-year period ended December 31, 2004 (in millions): |
| 2004 | 2003 | 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | |||||||||||
| Contract drilling | $ | 2.6 | $ | 9.6 | $ | 7.9 | |||||
| Marine transportation | -- | 7.6 | 48.6 | ||||||||
| 2.6 | 17.2 | 56.5 | |||||||||
| Operating expenses | |||||||||||
| Contract drilling | 3.7 | 12.5 | 12.4 | ||||||||
| Marine transportation | -- | 12.2 | 47.0 | ||||||||
| 3.7 | 24.7 | 59.4 | |||||||||
| Operating loss before income taxes | (1.1 | ) | (7.5 | ) | (2.9 | ) | |||||
| Income tax benefit | .4 | 2.6 | 1.0 | ||||||||
| Gain on sale of discontinued operations, net | -- | 4.1 | -- | ||||||||
| Loss from discontinued operations | $ | (.7 | ) | $ | (.8 | ) | $ | (1.9 | ) | ||
|
Table of Contents
|
|
Table of Contents
|
|
Detailed explanations of the Company's liquidity and capital resources for each of the years in the three-year period ended December 31, 2004, including discussions of cash flow from continuing operations and capital expenditures, financing and capital resources, off-balance sheet arrangements and contractual obligations and commercial commitments, are set forth below. Cash Flow from Continuing Operations and Capital Expenditures The Company's cash flow from continuing operations and capital expenditures on continuing operations for each of the years in the three-year period ended December 31, 2004 are as follows (in millions): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Cash flow from continuing operations | $ | 258.4 | $ | 290.6 | $ | 202.1 | |
| Capital expenditures on continuing operations: | |||||||
| Rig acquisition | $ | 94.6 | $ | -- | $ | -- | |
| New construction | 1.6 | 1.0 | 31.8 | ||||
| Enhancements | 161.8 | 139.6 | 147.7 | ||||
| Minor upgrades and improvements | 46.6 | 45.5 | 38.5 | ||||
| $ | 304.6 | $ | 186.1 | $ | 218.0 | ||
|
|
|
Table of Contents
|
|
The Company continues to expand the size and quality of its fleet of drilling rigs. During the past three years, the Company has invested $449.1 million upgrading the capability and extending the service lives of its drilling rigs as part of its ongoing enhancement program and an additional $34.4 million relating to the construction of new rigs. During 2004, the Company purchased the ENSCO 102 from an affiliated joint venture for a net payment of $94.6 million. Also during 2004, the Company transferred three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) to KFELS as partial payment for the construction of ENSCO 107. In 2002, the Company utilized a net $99.9 million of cash in connection with the Chiles acquisition. Upon completion of rig construction on February 7, 2005, the Company purchased ENSCO 106 from an affiliated joint venture for a net payment of $79.6 million. In addition to the acquisition of the ENSCO 106, management anticipates that capital expenditures in 2005 will include approximately $250.0 million for rig enhancement projects, approximately $65.0 million for construction of ENSCO 107 and approximately $50.0 million for minor upgrades and improvements. (See Note 6 to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information concerning the Company's investment in the joint venture related to ENSCO 106; see "Outlook" for information concerning the construction of ENSCO 107.) Depending on market conditions and opportunities, the Company may also make capital expenditures to construct or acquire additional rigs. |
|
Table of Contents
|
|
The Company's long-term debt, total capital and long-term debt to total capital ratios at December 31, 2004, 2003 and 2002 are summarized below (in millions, except percentages): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Long-term debt | $ 527.1 | $ 549.9 | $ 547.5 | ||||
| Total capital* | 2,709.0 | 2,631.0 | 2,514.5 | ||||
| Long-term debt to total capital | 19.5% | 20.9% | 21.8% | ||||
| * | Total capital includes long-term debt plus stockholders' equity. |
|
During the years ended December 31, 2004 and 2003, there were no significant changes in the Company's long-term debt or total capital. The Company's total capital increased substantially during the year ended December 31, 2002, due primarily to the $449.1 million of common stock issued and $153.0 million of long-term debt assumed in connection with the Chiles acquisition. The aggregate $31.1 million of proceeds from long-term borrowings during the three years ended December 31, 2004 was received under an interim rig construction loan that was subsequently replaced by long-term bonds. In addition to scheduled principal payments on outstanding bonds during the three years ended December 31, 2004, the Company paid $51.2 million in 2002 to retire all amounts outstanding under a revolving credit facility obtained in connection with the Chiles acquisition. At December 31, 2004, the Company has an aggregate $252.5 million outstanding under three separate bond issues that require semiannual principal and interest payments. The Company also makes semiannual interest payments on $150.0 million of notes and $150.0 million of debentures, due in 2007 and 2027, respectively. The future amount of principal and interest payments due in connection with the Company's outstanding long-term debt is summarized below in "Contractual Obligations and Commercial Commitments."
|
|
Table of Contents
|
|
Off-Balance Sheet Arrangements During recent years the Company entered into two separate joint venture arrangements with KFELS in connection with the construction and ownership of two jackup rigs. ENSCO Enterprises Limited ("EEL") was established by the Company (with an initial 25% ownership interest) and KFELS (with an initial 75% ownership interest) to own and charter ENSCO 102. Construction of ENSCO 102 commenced in 2000 and was completed in May 2002, after which the Company chartered ENSCO 102 from EEL. In January 2004, the Company exercised a purchase option and acquired ENSCO 102 from EEL and EEL was liquidated. ENSCO Enterprises Limited II ("EEL II") was established by the Company (25% ownership interest) and KFELS (75% ownership interest) in March 2003 to construct and own ENSCO 106. Upon completion of rig construction in February 2005, the Company exercised a purchase option and acquired ENSCO 106 from EEL II and EEL II was effectively liquidated. The Company's equity interests in EEL and EEL II constituted variable interests in variable interest entities, as defined in the Financial Accounting Standards Board's Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46R"). However, the Company did not absorb a majority of the expected losses or receive a majority of the expected residual returns of EEL and EEL II, as defined by FIN 46R, and accordingly was not required to consolidate EEL or EEL II. |
|
Table of Contents
|
|
Contractual Obligations The Company's significant contractual obligations as of December 31, 2004, and the periods in which such obligations are due, are as follows (in millions): |
| Payments due by period | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2008 | ||||||||||
| and | and | After | |||||||||
| 2005 | 2007 | 2009 | 2009 | Total | |||||||
| Principal payments on long-term debt | $ | 23.0 | $ | 196.0 | $ | 46.0 | $ | 287.5 | $ | 552.5 | |
| Interest payments on long-term debt | 35.1 | 66.2 | 40.6 | 224.2 | 366.1 | ||||||
| Operating leases | 5.1 | 4.2 | .8 | -- | 10.1 | ||||||
| ENSCO 107 construction agreement | 55.0 | -- | -- | -- | 55.0 | ||||||
| Other* | 86.4 | -- | -- | -- | 86.4 | ||||||
| Total contractual cash obligations | $ | 204.6 | $ | 266.4 | $ | 87.4 | $ | 511.7 | $ | 1,070.1 | |
| * | Other contractual obligations consist primarily of the $79.6 million paid in February 2005 in connection with the acquisition of ENSCO 106. |
|
Liquidity The Company's liquidity position at December 31, 2004, 2003 and 2002 is summarized in the table below (in millions, except ratios): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Cash and short-term investments | $267.0 | $354.0 | $185.5 | ||||
| Working capital | 277.9 | 355.9 | 189.2 | ||||
| Current ratio | 2.3 | 2.9 | 2.0 | ||||
|
Table of Contents
|
|
Table of Contents
|
|
In connection with the acquisition of Chiles on August 7, 2002, the Company obtained $80.0 million notional amount of outstanding treasury rate lock agreements that were scheduled to mature in October 2003. Upon acquisition, the Company designated approximately $65.0 million notional amount of the treasury rate lock agreements as an effective hedge against the variability in cash flows of $76.5 million of MARAD guaranteed bonds the Company intended to issue in October 2003. The Company deemed the remaining $15.0 million notional amount of treasury rate lock agreements obtained in the Chiles acquisition to be speculative in nature. The Company subsequently settled the $15.0 million notional amount of treasury rate lock agreements deemed as speculative in October 2002 ($10.0 million) and June 2003 ($5.0 million). The Company settled the $65.0 million notional amount of treasury rate lock agreements designated as an effective hedge in October 2003 in connection with the pricing and subsequent issuance of the MARAD bonds. (See Note 8 to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data".) The Company utilizes derivative instruments and undertakes hedging activities in accordance with its established policies for the management of market risk. The Company does not enter into derivative instruments for trading or other speculative purposes. Management believes that the Company's use of derivative instruments and related hedging activities do not expose the Company to any material interest rate risk, foreign currency exchange rate risk, commodity price risk, credit risk or any other market rate or price risk. |
|
47
Table of Contents
|
|
48
Table of Contents
|
|
North America As of February 22, 2004, all of the Company's jackup rigs in the North America region not undergoing enhancement procedures are working. The ENSCO 7500, the Company's deep water semisubmersible rig, is currently working and committed into the third quarter of 2007. Of the Company's three platform rigs, one is currently working, another is earning a standby rate while completing repairs caused by Hurricane Ivan and expected to return to service in late February 2005, and one is idle. The two platform rigs under contract are expected to work into the fourth quarter of 2005. The Company's three platform rigs have experienced average utilization of 63% over the previous five years, primarily as a result of reduced opportunities for deep-well drilling contracts. The Company's platform rigs, which are all capable of completing 25,000 to 30,000 feet wells, are best suited for long-term, deep well drilling applications where the platform rig components will stay in place for a substantial period of time. The Company's platform rigs currently compete against smaller, easier to mobilize and assemble, self-erecting platform rigs for shallow well drilling. The Company is not able to predict when there will be a recovery of drilling activity that will require a sustained use of the class of platform rigs owned and operated by the Company. The Company evaluated the carrying values of its platform rigs in December 2003 and determined such carrying values were not impaired. The Company will continue to perform such evaluations as circumstances dictate. Europe/Africa As of February 22, 2005, all of the Company's jackup rigs in the Europe/Africa region are working, with several rigs committed beyond the second quarter of 2005. The Company expects some idle time during the first and second quarters of 2005, primarily for regulatory inspections and remedial procedures, repairs and minor improvements and upgrades. |
|
49
Table of Contents
|
|
Table of Contents
|
|
Useful lives of rigs are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and gas exploration and development, changes in market or economic conditions, and changes in laws or regulations affecting the drilling industry. The Company evaluates the remaining useful lives of its rigs on a periodic basis, considering operating condition, functional capability and market and economic factors. The Company's most recent change in estimated useful lives occurred in January 1998, when the Company extended the useful lives of its drilling rigs by an average of five to six years. The Company's fleet of jackup rigs (42 as of December 31, 2004), which comprise in excess of 78% of both the gross cost and net carrying amount of the Company's property and equipment at December 31, 2004, is depreciated over useful lives ranging from 15 to 30 years. The Company's semisubmersible rig is depreciated over a 30-year useful life and its seven barge rigs are depreciated over 20-year useful lives. The Company's three platform rigs are depreciated over useful lives ranging from 13 to 16 years. The following table provides an analysis of estimated increases and decreases in depreciation expense that would have been recognized for the year ended December 31, 2004, for various assumed changes in the useful lives of the Company's drilling rigs effective January 1, 2004: |
| Increase (decrease) in useful lives of the Company's drilling rigs |
Estimated increase (decrease) in depreciation expense that would have been recognized (in millions) | ||
|---|---|---|---|
| 10% | $(13.1) | ||
| 20% | (24.0) | ||
| (10%) | 15.8 | ||
| (20%) | 35.5 | ||
|
Table of Contents
|
|
The Company evaluates the carrying value of its property and equipment, primarily its drilling rigs, when events or changes in circumstances indicate that the carrying value of such rigs may not be recoverable. Generally, extended periods of idle time and/or inability to contract rigs at economical rates are an indication that a rig may be impaired. However, the offshore drilling industry is highly cyclical and it is not unusual for rigs to be unutilized or underutilized for significant periods of time and subsequently resume full or near full utilization when business cycles change. Likewise, during periods of supply and demand imbalance, rigs are frequently contracted at or near cash break-even rates for extended periods of time until demand comes back into balance with supply. Impairment situations may arise with respect to specific individual rigs, groups of rigs, such as a specific type of drilling rig, or rigs in a certain geographic location. The Company's rigs are mobile and may be moved from markets with excess supply, if economically feasible. The Company's jackup rigs and semisubmersible rig are suited for, and accessible to, broad and numerous markets throughout the world. However, there are fewer economically feasible markets available to the Company's barge rigs and platform rigs. The Company tests goodwill for impairment on an annual basis, or when events or changes in circumstances indicate that a potential impairment exists. The goodwill impairment test requires the Company to identify reporting units and estimate the fair value of those units as of the testing date. If the estimated fair value of a reporting unit exceeds its carrying value, its goodwill is considered not impaired. If the estimated fair value of a reporting unit is less than its carrying value, the Company estimates the implied fair value of the reporting unit's goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to such excess. In the event the Company disposes drilling rig operations that constitute a business, goodwill would be allocated in the determination of gain or loss on sale. Based on the Company's test performed as of December 31, 2004, there was no impairment of goodwill. Asset impairment evaluations are, by nature, highly subjective. In most instances they involve expectations of future cash flows to be generated by the Company's drilling rigs, and are based on management's assumptions and judgments regarding future industry conditions and operations, as well as management's estimates of future expected utilization, contract rates, expense levels and capital requirements of the Company's drilling rigs. The estimates, assumptions and judgments used by management in the application of the Company's asset impairment policies reflect both historical experience and an assessment of current operational, industry, economic and political environments. The use of different estimates, assumptions, judgments and expectations regarding future industry conditions and operations, would likely result in materially different carrying values of assets and results of operations. |
|
Table of Contents
|
|
Income Taxes The Company conducts operations and earns income in numerous foreign countries and is subject to the laws of taxing jurisdictions within those countries, as well as U.S. federal and state tax laws. At December 31, 2004, the Company has a $359.5 million net deferred income tax liability and $57.8 million of accrued liabilities for income taxes currently payable. The carrying values of deferred income tax assets and liabilities reflect the application of the Company's income tax accounting policies in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), and are based on management's assumptions and estimates regarding future operating results and levels of taxable income, as well as management's judgments regarding the interpretation of the provisions of SFAS 109. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a "more likely than not" determination. A U.S. deferred tax liability has not been recognized for undistributed earnings of foreign subsidiaries because it is not practicable to estimate. Should the Company elect to make a distribution of foreign earnings, or be deemed to have made a distribution of foreign earnings through application of various provisions of the Internal Revenue Code, it may be subject to additional U.S. income taxes. The carrying values of liabilities for income taxes currently payable are based on management's interpretation of applicable tax laws, and incorporate management's assumptions and judgments regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and results of operations. |
|
Table of Contents
|
|
|
| • | During recent years the portion of the Company's overall operations conducted in foreign tax jurisdictions has been increasing and the Company currently anticipates this trend will continue. | |
• |
In order to deploy tax planning strategies and conduct foreign operations efficiently, the Company's subsidiaries frequently enter into transactions with affiliates, which are generally subject to complex tax regulations and frequently are reviewed by tax authorities. | |
• |
The Company may conduct future operations in certain tax jurisdictions where tax laws are not well developed and it may be difficult to secure adequate professional guidance. | |
• |
Tax laws, regulations, agreements and treaties change frequently, requiring the Company to modify existing tax strategies to conform to such changes. |
|
Table of Contents
|
|
Table of Contents
|
|
Table of Contents
|
|
Table of Contents
|
|
58 Table of Contents
|
|
|
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||
| OPERATING REVENUES | $ | 768.0 | $ | 781.2 | $ | 641.6 | |
| OPERATING EXPENSES | |||||||
| Contract drilling | 425.5 | 445.2 | 341.5 | ||||
| Depreciation and amortization | 144.1 | 130.2 | 112.0 | ||||
| Impairment of assets | -- | -- | 59.9 | ||||
| General and administrative | 26.3 | 22.0 | 18.6 | ||||
| 595.9 | 597.4 | 532.0 | |||||
| OPERATING INCOME | 172.1 | 183.8 | 109.6 | ||||
| OTHER INCOME (EXPENSE) | |||||||
| Interest income | 3.7 | 3.4 | 5.1 | ||||
| Interest expense, net | (36.6 | ) | (36.7 | ) | (31.1 | ) | |
| Other, net | .3 | 1.7 | 6.4 | ||||
| (32.6 | ) | (31.6 | ) | (19.6 | ) | ||
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 139.5 | 152.2 | 90.0 | ||||
| PROVISION FOR INCOME TAXES | |||||||
| Current income tax expense | 12.1 | 14.0 | 18.9 | ||||
| Deferred income tax expense | 23.9 | 29.1 | 9.9 | ||||
| 36.0 | 43.1 | 28.8 | |||||
| INCOME FROM CONTINUING OPERATIONS | 103.5 | 109.1 | 61.2 | ||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS | |||||||
| Loss from discontinued operations, net | (.7 | ) | (4.9 | ) | (1.9 | ) | |
| Gain on disposal of discontinued operations, net | -- | 4.1 | -- | ||||
| (.7 | ) | (.8 | ) | (1.9 | ) | ||
| NET INCOME | $ | 102.8 | $ | 108.3 | $ | 59.3 | |
| EARNINGS (LOSS) PER SHARE - BASIC | |||||||
| Continuing operations | $ | .69 | $ | .73 | $ | .43 | |
| Discontinued operations | (.01 | ) | (.01 | ) | (.01 | ) | |
| $ | .68 | $ | .72 | $ | .42 | ||
| EARNINGS (LOSS) PER SHARE - DILUTED | |||||||
| Continuing operations | $ | .69 | $ | .73 | $ | .43 | |
| Discontinued operations | (.01 | ) | (.01 | ) | (.01 | ) | |
| $ | .68 | $ | .72 | $ | .42 | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | |||||||
| Basic | 150.5 | 149.6 | 140.7 | ||||
| Diluted | 150.6 | 150.1 | 141.4 | ||||
| CASH DIVIDENDS PER COMMON SHARE | $ | .10 | $ | .10 | $ | .10 | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
59
Table of Contents
|
|
|
| December 31, | |||||
|---|---|---|---|---|---|
| 2004 | 2003 | ||||
|
ASSETS |
|||||
| CURRENT ASSETS | |||||
| Cash and cash equivalents | $ | 267.0 | $ | 354.0 | |
| Accounts receivable, net | 183.0 | 149.4 | |||
| Prepaid expenses and other | 43.7 | 39.9 | |||
| Total current assets | 493.7 | 543.3 | |||
| PROPERTY AND EQUIPMENT, AT COST | 3,445.5 | 3,126.3 | |||
| Less accumulated depreciation | 1,014.2 | 909.1 | |||
| Property and equipment, net | 2,431.3 | 2,217.2 | |||
| GOODWILL | 341.0 | 342.7 | |||
| OTHER ASSETS, NET | 56.0 | 79.8 | |||
| $ | 3,322.0 | $ | 3,183.0 | ||
|
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| CURRENT LIABILITIES | |||||
| Accounts payable | $ | 15.6 | $ | 15.8 | |
| Accrued liabilities | 177.2 | 148.6 | |||
| Current maturities of long-term debt | 23.0 | 23.0 | |||
| Total current liabilities | 215.8 | 187.4 | |||
| LONG-TERM DEBT | 527.1 | 549.9 | |||
| DEFERRED INCOME TAXES | 375.3 | 345.9 | |||
| OTHER LIABILITIES | 21.9 | 18.7 | |||
| COMMITMENTS AND CONTINGENCIES | |||||
| STOCKHOLDERS' EQUITY | |||||
| First preferred stock, $1 par value, 5.0 million shares authorized, | |||||
| none issued | -- | -- | |||
| Preferred stock, $1 par value, 15.0 million shares authorized, | |||||
| none issued | -- | -- | |||
| Common stock, $.10 par value, 250.0 million shares authorized, | |||||
| 174.5 million and 173.9 million shares issued | 17.5 | 17.4 | |||
| Additional paid-in capital | 1,420.0 | 1,409.0 | |||
| Retained earnings | 1,016.3 | 928.6 | |||
| Restricted stock (unearned compensation) | (12.5 | ) | (13.0 | ) | |
| Accumulated other comprehensive loss | (9.0 | ) | (10.9 | ) | |
| Treasury stock, at cost, 23.4 million shares | (250.4 | ) | (250.0 | ) | |
| Total stockholders' equity | 2,181.9 | 2,081.1 | |||
| $ | 3,322.0 | $ | 3,183.0 | ||
| The accompanying notes are an integral part of these consolidated financial statements. |
|
60
Table of Contents
|
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) |
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | |||||
| OPERATING ACTIVITIES | |||||||
| Net income | $ | 102.8 | $ | 108.3 | $ | 59.3 | |
| Adjustments to reconcile net income to net cash provided | |||||||
| by operating activities: | |||||||
| Loss from discontinued operations, net | .7 | 4.9 | 1.9 | ||||
| Depreciation and amortization | 144.1 | 130.2 | 112.0 | ||||
| Impairment of assets | -- | -- | 59.9 | ||||
| Deferred income tax provision | 23.9 | 29.1 | 9.9 | ||||
| Gain on sale of discontinued operations, net | -- | (4.1 | ) | -- | |||
| Tax benefit from stock compensation | 2.1 | 6.6 | 4.0 | ||||
| Amortization of other assets | 6.3 | 5.6 | 10.3 | ||||
| Net loss (gain) on asset dispositions | .3 | -- | (5.8 | ) | |||
| Other | 3.5 | 2.5 | 2.5 | ||||
| Changes in operating assets and liabilities: | |||||||
| Decrease (increase) in accounts receivable | (33.6 | ) | 13.8 | (30.6 | ) | ||
| Increase in prepaid expenses and other assets | (8.0 | ) | (11.6 | ) | (21.2 | ) | |
| Increase (decrease) in accounts payable | (.1 | ) | .6 | (13.5 | ) | ||
| Increase in accrued and other liabilities | 16.4 | 4.7 | 13.4 | ||||
|
Net cash provided by operating activities of continuing operations | 258.4 | 290.6 | 202.1 | ||||
| INVESTING ACTIVITIES | |||||||
| Additions to property and equipment | (304.6 | ) | (186.1 | ) | (218.0 | ) | |
| Net cash used in Chiles acquisition | -- | -- | (99.9 | ) | |||
| Net proceeds from sale of discontinued operations | -- | 78.8 | -- | ||||
| Proceeds from disposition of assets | 3.1 | 5.2 | 24.3 | ||||
| Sale (purchase) of short-term investments | -- | 38.4 | (6.8 | ) | |||
| Sale of long-term investments | -- | -- | 23.0 | ||||
| Investment in joint ventures | (11.3 | ) | (13.5 | ) | -- | ||
| Net cash used in investing activities of continuing operations | (312.8 | ) | (77.2 | ) | (277.4 | ) | |
| FINANCING ACTIVITIES | |||||||
| Proceeds from long-term borrowings | -- | 26.7 | 4.4 | ||||
| Reduction of long-term borrowings | (23.0 | ) | (23.0 | ) | (63.7 | ) | |
| Cash dividends paid | (15.1 | ) | (15.0 | ) | (14.2 | ) | |
| Proceeds from exercise of stock options | 7.8 | 12.4 | 19.5 | ||||
| Deferred financing costs | -- | (5.8 | ) | (1.3 | ) | ||
| Other | (.4 | ) | (.7 | ) | (1.0 | ) | |
|
Net cash used in financing activities of continuing operations | (30.7 | ) | (5.4 | ) | (56.3 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | (2.0 | ) | .9 | (.9 | ) | ||
| Net cash (used in) provided by discontinued operations | .1 | (2.0 | ) | .8 | |||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (87.0 | ) | 206.9 | (131.7 | ) | ||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 354.0 | 147.1 | 278.8 | ||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 267.0 | $ | 354.0 | $ | 147.1 | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
61
Table of Contents
|
|
|
| 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
Business ENSCO International Incorporated and subsidiaries (the "Company") is one of the leading international providers of offshore drilling services to the oil and gas industry. The Company's contract drilling operations are integral to the exploration, development and production of oil and gas. Business levels for the Company, and its corresponding operating results, are significantly affected by worldwide levels of offshore exploration and development spending by oil and gas companies. Levels of offshore exploration and development spending may fluctuate substantially from year to year and from region to region. Such fluctuations result from many factors, including demand for oil and gas, regional and global economic conditions, political and legislative environments in major oil-producing countries, the production levels and related activities of OPEC and other oil and gas producers, technological advancements that impact the methods or cost of oil and gas exploration and development, and the impact that these and other events have on the current and expected future pricing of oil and natural gas (see Note 14 "Segment Information" for additional information concerning the Company's operations by geographic region). Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Pervasiveness of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Actual results could differ from those estimates. |
|
62
Table of Contents
|
|
The U.S. dollar is the functional currency of all the Company's foreign subsidiaries. The financial statements of foreign subsidiaries are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Gains and losses caused by the remeasurement process are reflected in the consolidated statements of income. The Company had net translation gains of $2.0 million for the year ended December 31, 2004, net translation losses of $900,000 for the year ended December 31, 2003 and net translation gains of $900,000 for the year ended December 31, 2002. In prior years, the financial statements of certain foreign subsidiaries were maintained in the local foreign currency. Foreign currency translation adjustments for those subsidiaries were accumulated as a separate component of stockholders' equity and are included in accumulated other comprehensive loss at December 31, 2004 and 2003. Cash Equivalents and Short-Term Investments Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments. All of the Company's short-term investments are classified as held-to-maturity and stated at amortized cost. Property and Equipment All costs incurred in connection with the acquisition, construction, enhancement and improvement of assets are capitalized, including allocations of interest incurred during periods that drilling rigs are under construction or undergoing major enhancements and improvements. Maintenance and repair costs are charged to operating expenses. Upon sale or retirement of assets, the related cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income. |
|
Table of Contents
|
|
The Company evaluates the carrying value of its property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For property and equipment used in the Company's operations, recoverability is determined by comparing the net carrying value of an asset to either an independent fair value appraisal of the asset or the expected undiscounted future cash flows, before interest, of the asset. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value. Property and equipment held for sale is recorded at the lower of net book value or net realizable value. The Company recorded no impairment charges during the years ended December 31, 2004 and 2003. The Company recorded an impairment charge of $59.9 million in 2002, related to certain assets in Venezuela (see Note 4 "Venezuela Impairment"). Goodwill Goodwill is recorded at fair value. The Company tests goodwill for impairment on an annual basis, or when events or changes in circumstances indicate that a potential impairment exists. The Company performed its annual goodwill impairment test as of December 2004 and determined that goodwill was not impaired. The Company initially recorded $246.4 million of goodwill during August 2002 in connection with the acquisition of Chiles Offshore Inc. ("Chiles"). During 2004 and 2003, the Company recorded purchase price adjustments reducing goodwill by $1.7 million and $7.5 million, respectively, primarily related to deferred taxes. The following table summarizes changes in the Company's goodwill during 2004 and 2003: |
| 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Balance as of January 1 | $ | 342.7 | $ | 350.2 | ||||
| Purchase price adjustments | (1.7 | ) | (7.5 | ) | ||||
| Balance as of December 31 | $ | 341.0 | $ | 342.7 | ||||
|
Table of Contents
|
|
Substantially all of the Company's drilling services contracts ("contracts") are performed on a day rate basis and the terms of such contracts are typically for a specific period of time or the period of time required to complete a specific task, such as drilling a well. Contract revenue and expenses are recognized on a per day basis, as the work is performed. Day rate revenues are typically earned, and contract drilling expenses are typically incurred, on a uniform basis over the terms of the Company's contracts. In connection with some contracts, the Company receives lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in operating revenue. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in contract drilling expense. Effective October 1, 2004, the Company changed its method of accounting for the fees received and related costs incurred to mobilize its rigs from one geographic area to another. Mobilization fees received and costs incurred are now deferred and recognized over the period that the related drilling services are performed on a straight-line basis. Prior to October 1, 2004, only the excess of mobilization fees received over costs incurred or the excess of mobilization costs incurred over fees received, as applicable, was deferred and recognized over the period that the related drilling services are performed on a straight-line basis. The Company changed its method of accounting for mobilization fees and costs because it believes it is more appropriate to defer all mobilization fees and costs during the mobilization period and subsequently recognize them over the period that the drilling services are performed. If the method of accounting for mobilization fees and costs adopted on October 1, 2004, had been utilized in prior periods, the Company's operating income and net income would not have changed and the change in the amounts of operating revenue and contract drilling expenses within previously reported periods would not have been material. Demobilization fees and related costs are recognized as incurred, upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. |
|
Table of Contents
|
|
In connection with some contracts, the Company receives up-front, lump-sum fees or similar compensation for capital improvements to its rigs or vessels. Such compensation is deferred and recognized as revenue over the related contract period. The cost of such capital improvements is capitalized and depreciated over the useful life of the asset. Deferred revenue associated with capital improvements is included in accrued liabilities and totaled $1.1 million and $2.5 million at December 31, 2004 and 2003, respectively. The Company must obtain certifications from various regulatory bodies in order to operate its drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized over the corresponding certification periods. Deferred regulatory certification and compliance costs are included in prepaid expenses and other current assets and other assets, net, and totaled $7.0 million and $8.0 million at December 31, 2004 and 2003, respectively. |
|
Table of Contents
|
|
The Company uses derivative financial instruments ("derivatives") to reduce its exposure to various market risks, primarily interest rate risk and foreign currency risk. The Company employs an interest rate risk management strategy that occasionally utilizes derivatives to minimize or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. The Company maintains a foreign currency risk management strategy that utilizes derivatives to reduce its exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. The Company does not enter into derivatives for trading or other speculative purposes. All derivatives are recorded on the Company's consolidated balance sheet at fair value. Accounting for the gains and losses resulting from changes in the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Derivatives qualify for hedge accounting when they are formally designated as hedges at inception of the associated derivative contract and are effective in reducing the risk exposure that they are designated to hedge. The Company's assessment for hedge effectiveness is formally documented at hedge inception and the Company reviews hedge effectiveness throughout the designated hedge period on at least a quarterly basis. Changes in the fair value of derivatives that are designated as hedges of the fair value of recognized assets or liabilities or unrecognized firm commitments ("fair value hedges") are recorded currently in earnings and included in "other, net" on the consolidated statement of income. Changes in the fair value of derivatives that are designated as hedges of the variability in expected future cash flows associated with existing recognized assets or liabilities or forecasted transactions ("cash flow hedges") are recorded in the accumulated other comprehensive loss section of stockholders' equity. Amounts recorded in accumulated other comprehensive loss associated with cash flow hedges are subsequently reclassified into earnings as earnings are affected by the underlying hedged forecasted transaction. Gains and losses on a cash flow hedge, or a portion of a cash flow hedge, that no longer qualifies as effective due to an unanticipated change in forecasted transactions are recognized currently in earnings and included in "other, net" on the consolidated statement of income based on the change in the market value of the cash flow hedge. When a forecasted transaction is no longer likely to occur and a cash flow hedge contract is terminated, gains and losses on the cash flow hedge previously recorded in the accumulated other comprehensive loss section of shareholders' equity are reclassified currently into earnings and included in "other, net" on the consolidated statement of income. In assessing the effectiveness of a cash flow hedge, the hedge's time value component is excluded from the measurement of hedge effectiveness and recognized currently in earnings in "other, net" on the consolidated statement of income. |
|
Table of Contents
|
|
Derivatives with asset fair values are reported in other current assets or other assets, net, depending on maturity date. Derivatives with liability fair values are reported in accrued current liabilities or other liabilities, depending on maturity date. At December 31, 2004 and 2003, the fair value of the Company's foreign currency derivatives was a net asset of $4.0 million and $2.0 million, respectively. Income Taxes The Company conducts operations and earns income in numerous foreign countries and is subject to the laws of taxing jurisdictions within those countries, as well as U.S. federal and state tax laws. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned. Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using the enacted tax rates in effect at year end. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. It is the policy and intention of the Company to permanently reinvest all of the undistributed earnings of its foreign subsidiaries in such subsidiaries. Accordingly, no U.S. deferred taxes are provided on the undistributed earnings of foreign subsidiaries. The Company's drilling rigs are frequently moved from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may include a transfer of the ownership of the drilling rig among the Company's subsidiaries. Income taxes attributable to gains resulting from intercompany sales of the Company's drilling rigs, as well as the tax effect of any reversing temporary differences resulting from intercompany sales or transfers, are deferred and amortized on a straight-line basis over the remaining useful life of the rig. In some instances, the Company determines that certain temporary differences may not result in a taxable or deductible amount in future years, as it is more likely than not the Company will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. The Company evaluates its determinations on a periodic basis and in the event its expectations relative to future tax consequences change, the applicable deferred taxes are recognized. |
|
Table of Contents
|
|
The Company uses the intrinsic value method of accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). No compensation expense related to employee stock options is included in the Company's net income, as the exercise price of the Company's stock options equals the market value of the underlying stock on the date of grant. The following table includes disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" as amended ("SFAS 123"), and illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 for each of the years in the three-year period ended December 31, 2004 (in millions, except per share amounts): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Net income, as reported | $ | 102.8 | $ | 108.3 | $ | 59.3 | |
| Less stock-based employee compensation expense, net of tax | (9.7 | ) | (9.2 | ) | (12.6 | ) | |
| Pro forma net income | $ | 93.1 | $ | 99.1 | $ | 46.7 | |
| Basic earnings per share: | |||||||
| As reported | $ | .68 | $ | .72 | $ | .42 | |
| Pro forma | .62 | .66 | .33 | ||||
| Diluted earnings per share: | |||||||
| As reported | .68 | .72 | .42 | ||||
| Pro forma | .62 | .66 | .33 | ||||
|
|
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Risk-free interest rate | 3.2% | 2.2% | 3.9% | ||||
| Expected life (in years) | 4.1 | 4.3 | 4.5 | ||||
| Expected volatility | 40.7% | 48.1% | 52.5% | ||||
| Dividend yield | .4% | .3% | .4% | ||||
|
Table of Contents
|
|
Earnings Per Share For each of the years in the three-year period ended December 31, 2004, there were no adjustments to net income for purposes of calculating basic and diluted earnings per share. The following is a reconciliation of the weighted average common shares used in the basic and diluted earnings per share computations for each of the years in the three-year period ended December 31, 2004 (in millions):
|
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Weighted average common shares outstanding (basic) | 150.5 | 149.6 | 140.7 | ||||
| Potentially dilutive common shares: | |||||||
| Restricted stock grants | .1 | .0 | .0 | ||||
| Stock options | .0 | .5 | .7 | ||||
| Weighted average common shares outstanding (diluted) | 150.6 | 150.1 | 141.4 | ||||
|
Options to purchase 3.3 million shares of common stock in 2004, 3.4 million shares of common stock in 2003 and 3.3 million shares of common stock in 2002 were not included in the computation of diluted earnings per share because the exercise price of the options exceeded the average market price of the common stock. Reclassifications Certain previously reported amounts have been reclassified to conform to the 2004 presentation. |
|
Table of Contents
|
|
On August 7, 2002, the Company acquired Chiles Offshore Inc. ("Chiles") pursuant to a Merger Agreement by and among the Company, Chore Acquisition, Inc., a wholly-owned subsidiary of the Company, and Chiles (the "Merger Agreement"). Under the terms of the Merger Agreement, each Chiles shareholder received 0.6575 of a share of the Company's common stock and $5.25 in cash in exchange for each share of Chiles common stock held. The Company issued approximately 13.3 million shares of its common stock, and paid approximately $106.6 million in cash to the holders of Chiles common stock. The merger was accounted for as a purchase business combination in accordance with accounting principles generally accepted in the United States, with the Company treated as the acquirer. The $567.9 million purchase price was calculated using the number of the Company's common shares issued in the acquisition and a $33.65 per share average trading price of the Company's common stock for a period of time immediately before and after the merger was announced, plus cash consideration of $5.25 per share of Chiles common stock outstanding immediately prior to the merger, estimated direct merger fees and expenses and the estimated fair value of vested Chiles employee stock options. The purchase price was allocated to assets acquired and liabilities assumed based on estimated fair market values at the date of acquisition. The Company has recorded $237.2 million of goodwill in connection with the acquisition, which is supported by the nature of the offshore drilling industry, the acquisition of long-lived drilling equipment, and the assembled workforce of Chiles. 3. DISCONTINUED OPERATIONS In February 2004, the Company entered into an agreement with Keppel FELS Limited ("KFELS"), a major international shipyard, to exchange three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) and $55.0 million for the construction of a new high performance premium jackup rig to be named ENSCO 107. The exchange of the three rigs occurred in May 2004 and was treated as a sale with no significant gain or loss recognized, as the fair value of the rigs approximated their book value of $39.9 million. The results of operations of the ENSCO 23, ENSCO 24 and ENSCO 55 have been reclassified as discontinued operations in the consolidated statements of income for each of the years in the three-year period ended December 31, 2004. In February 2003, the Company reached an agreement to sell its 27-vessel marine transportation fleet. After receipt of various regulatory consents, the transaction was finalized in April 2003 for approximately $79.0 million. The Company recognized a pre-tax gain of approximately $6.4 million related to the transaction. The operating results of the marine transportation fleet, which represent the entire marine transportation services segment previously reported by the Company, have been reclassified as discontinued operations in the consolidated statements of income for each of the years in the two-year period ended December 31, 2003. |
|
Table of Contents
|
|
|
| 2004 | 2003 | 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | |||||||||||
| Contract drilling | $ | 2.6 | $ | 9.6 | $ | 7.9 | |||||
| Marine transportation | -- | 7.6 | 48.6 | ||||||||
| 2.6 | 17.2 | 56.5 | |||||||||
| Operating expenses | |||||||||||
| Contract drilling | 3.7 | 12.5 | 12.4 | ||||||||
| Marine transportation | -- | 12.2 | 47.0 | ||||||||
| 3.7 | 24.7 | 59.4 | |||||||||
| Operating loss before income taxes | (1.1 | ) | (7.5 | ) | (2.9 | ) | |||||
| Income tax benefit | .4 | 2.6 | 1.0 | ||||||||
| Gain on sale of discontinued operations, net | -- | 4.1 | -- | ||||||||
| Loss from discontinued operations | $ | (.7 | ) | $ | (.8 | ) | $ | (1.9 | ) | ||
|
4. VENEZUELA IMPAIRMENT The Company's South America/Caribbean barge rig fleet operations have historically been concentrated on Lake Maracaibo in Venezuela. Lake Maracaibo market conditions have been depressed for several years due to reduced or deferred exploration and development spending by Venezuela's national oil company, Petroleos de Venezuela, S.A. ("PdVSA"). In addition, the economic and political situation in Venezuela has become increasingly unstable during recent years. As a result of the uncertainty surrounding its South America/Caribbean barge rig fleet, the Company has evaluated the carrying value of the barge rigs for impairment on a regular basis during recent years. |
|
Table of Contents
|
|
In order to calculate the impairment charge, the Company utilized the traditional present value method to determine the fair value of its barge rigs. Expected future cash flows to be generated by the barge rigs were developed based on management assumptions and judgments regarding future Venezuela industry conditions and operations, and included estimates of future utilization, day rates, expense levels and capital requirements of the barge rigs, discounted at a ten percent rate commensurate with the risk of the expected future cash flows. There was little change in the economic and political environment in Venezuela during 2003 and 2004, as PdVSA continued to limit capital spending, particularly in the Lake Maracaibo area. The timing of an expected recovery of drilling activity in Venezuela is uncertain. While several of the Company's barge rigs are suited for other markets, both locally and globally, such markets are not nearly as extensive as the markets available to jackup or semisubmersible rigs. The Company evaluated the carrying value of its barge rigs in December 2003 and 2004 and will continue to perform such evaluations and monitor the situation in Venezuela, as circumstances dictate. No impairment charges were recorded during the years ended December 31, 2004 and 2003. At December 31, 2004, the carrying value of the Company's six barge rigs in Venezuela totaled $46.2 million. |
|
Table of Contents
|
|
Property and equipment at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Drilling rigs and equipment | $ | 3,256.8 | $ | 3,046.9 | |
| Other | 44.2 | 39.7 | |||
| Work in progress | 144.5 | 39.7 | |||
| $ | 3,445.5 | $ | 3,126.3 | ||
|
In January 2004, the Company exercised a purchase option and acquired ENSCO 102 from an affiliated joint venture for a net payment of $94.6 million (see Note 6 "Investment in Joint Ventures"). Additions to property and equipment during 2004 include $135.8 million for the acquisition of ENSCO 102, consisting of the $94.6 million payment and the Company's $41.2 million net investment in the joint venture. In May 2004, the Company transferred three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) to KFELS as partial payment for the construction of a new high performance premium jackup rig to be named ENSCO 107 (see Note 3 "Discontinued Operations"). ENSCO 107 will be an enhanced KFELS MOD V (B) design modified to ENSCO specifications and delivery is expected in late 2005 or early 2006. Work in progress at December 31, 2004 includes costs associated with various modification and enhancement projects and $41.5 million related to the construction of ENSCO 107. The Company will pay an additional $55 million to KFELS in 2005 in connection with the construction agreement. Additions to property and equipment in 2004, 2003 and 2002 include $181.7 million, $114.5 million and $163.1 million, respectively, in connection with major modification and enhancement projects that improve the capability and extend the service lives of drilling rigs. The Company evaluates the performance of its drilling rigs on an ongoing basis, and seeks opportunities to sell those that are less capable or less competitive. |
|
74
Table of Contents
|
|
During the fourth quarter of 2000, the Company entered into an agreement with KFELS and acquired a 25% ownership interest in a harsh environment jackup rig under construction, which was subsequently named ENSCO 102. Upon completion of rig construction in the second quarter of 2002, the Company and KFELS established a joint venture company, ENSCO Enterprises Limited ("EEL"), to own and charter ENSCO 102. The Company and KFELS transferred their respective interests in ENSCO 102 to EEL in exchange for promissory notes in the amount of $32.5 million and $97.3 million, respectively. The Company and KFELS had initial ownership interests in EEL of 25% and 75%, respectively. Concurrent with the transfer of the rig to EEL, the Company agreed to charter ENSCO 102 from EEL for a two-year period that was scheduled to expire in May 2004. Under the terms of the charter, the majority of the net cash flow generated by ENSCO 102 operations was remitted to EEL in the form of charter payments. However, the charter obligation was determined on a cumulative basis such that cash flow deficits incurred prior to initial rig operations were satisfied prior to the commencement of charter payments. Charter proceeds received by EEL were used to pay interest on the promissory notes and any cash remaining after all accrued interest has been paid was used to repay the outstanding principal of the KFELS promissory note. Pursuant to an agreement between the Company and KFELS, the respective ownership interests of the Company and KFELS in EEL were adjusted concurrently with repayments of principal on the KFELS promissory note such that each party's ownership interest was equal to the ratio of its outstanding promissory note balance to the aggregate outstanding principal balance of both promissory notes. |
|
Table of Contents
|
|
|
| ENSCO Enterprises Limited Condensed Balance Sheet December 31, 2003 (in millions) (unaudited) |
| Assets | |||||
| Cash | $ | 1.5 | |||
| Charter revenue receivable | 2.9 | ||||
| Property and equipment, net of accumulated depreciation | 122.0 | ||||
| $ | 126.4 | ||||
| Liabilities and Stockholders' Equity | |||||
| Interest payable | $ | 3.1 | |||
| Notes payable | 124.9 | ||||
| Stockholder's equity | |||||
| Common stock and paid in capital | 4.9 | ||||
| Accumulated deficit | (6.5 | ) | |||
| Total stockholders' equity | (1.6 | ) | |||
| $ | 126.4 | ||||
|
Table of Contents
|
| ENSCO Enterprises Limited Condensed Statement of Operations (in millions) (unaudited) |
| Period from | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, | May 7, 2002 (Inception) | ||||||||||
| 2004 | 2003 | to December 31, 2002 | |||||||||
| Charter revenue | $ | 1.6 | $ | 17.1 | $ | .3 | |||||
| Depreciation expense | (.5 | ) | (5.9 | ) | (1.9 | ) | |||||
| Interest expense | (.8 | ) | (9.7 | ) | (6.4 | ) | |||||
| Net income (loss) | $ | .3 | $ | 1.5 | $ | (8.0 | ) | ||||
|
ENSCO 102 commenced drilling operations under a term contract in September 2002. During December 2002, all of the cash flow deficits incurred prior to initial rig operations were satisfied and EEL began recognizing charter revenue. At December 31, 2003, the Company's ownership interest in EEL was 26% and the Company's net investment in EEL totaled $41.9 million, which is included in other assets, net on the consolidated balance sheet. The Company recognized $400,000, $2.8 million and $500,000, net of intercompany eliminations, from its equity in the earnings of EEL for the years ended December 31, 2004, 2003 and 2002, respectively. The Company's equity in the earnings and losses of EEL is included in contract drilling expenses on the consolidated statements of income. During the first quarter of 2003, the Company entered into an agreement with KFELS to establish a second joint venture company, ENSCO Enterprises Limited II ("EEL II"), to construct a premium heavy duty jackup rig to be named ENSCO 106. The Company agreed to contribute $3.0 million of procurement and management services and $23.3 million in cash for a 25% interest in EEL II. The terms of the EEL II agreement are similar to those of the EEL agreement, with the Company holding an option to purchase the remaining 75% interest in ENSCO 106, at a formula derived price, at any time during construction or the two-year period after completion of construction. At December 31, 2004 and 2003, the Company's net investment in EEL II totaled $23.2 million and $11.9 million, respectively, and is included in other assets, net on the consolidated balance sheet. Upon completion of rig construction in February 2005, the Company exercised its purchase option and acquired ENSCO 106 for a net payment of $79.6 million. EEL II was effectively liquidated upon the Company's acquisition of ENSCO 106. |
|
77
Table of Contents
|
|
7. LONG-TERM DEBT Long-term debt at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| 4.65% Bonds due 2020 | $ | 72.0 | $ | 76.5 | |
| 5.63% Bonds due 2011 | 40.5 | 46.3 | |||
| 6.36% Bonds due 2015 | 139.4 | 152.0 | |||
| 6.75% Notes due 2007 | 149.7 | 149.6 | |||
| 7.20% Debentures due 2027 | 148.5 | 148.5 | |||
| 550.1 | 572.9 | ||||
| Less current maturities | (23.0 | ) | (23.0 | ) | |
| Total long-term debt | $ | 527.1 | $ | 549.9 | |
|
4.65% Bonds Due 2020 In October 2003, the Company issued $76.5 million of 17-year bonds to provide long-term financing for the ENSCO 105. The bonds are guaranteed by the United States Maritime Administration ("MARAD") and will be repaid in 34 equal semiannual principal installments of $2.3 million ending in October 2020. Interest on the bonds is payable semiannually, in April and October, at a fixed rate of 4.65%. The bonds are collateralized by the ENSCO 105 and the Company has guaranteed the performance of its obligations under the bonds to MARAD. Proceeds from the bond issuance were used to retire a floating rate term loan that provided interim financing for the construction of the ENSCO 105. |
|
78
Table of Contents
|
|
In connection with the acquisition of Chiles on August 7, 2002, the Company assumed Chiles' bonds that were originally issued to provide long-term financing for the ENSCO 76. The bonds are guaranteed by MARAD and are being repaid in 24 equal semiannual principal installments of $2.9 million ending in July 2011. Interest on the bonds is payable semiannually, in January and July, at a fixed rate of 5.63%. The bonds are collateralized by the ENSCO 76 and the Company has guaranteed the performance of its obligations under the bonds to MARAD. The outstanding principal balance of the bonds at the August 7, 2002 acquisition date was $52.9 million and the Company recorded an approximate $700,000 discount on the debt. 6.36% Bonds Due 2015 In January 2001, the Company issued $190.0 million of 15-year bonds to provide long-term financing for the ENSCO 7500. The bonds are guaranteed by MARAD and are being repaid in 30 equal semiannual principal installments of $6.3 million ending in December 2015. Interest on the bonds is payable semiannually, in June and December, at a fixed rate of 6.36%. The bonds are collateralized by the ENSCO 7500 and the Company has guaranteed the performance of its obligations under the bonds to MARAD. Notes Due 2007 and Debentures Due 2027 In November 1997, the Company issued $300.0 million of unsecured debt in a public offering, consisting of $150.0 million of 6.75% Notes due November 15, 2007 (the “Notes”) and $150.0 million of 7.20% Debentures due November 15, 2027 (the “Debentures”). Interest on the Notes and the Debentures is payable semiannually in May and November. The Notes and Debentures may be redeemed at any time at the option of the Company, in whole or in part, at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, and a make-whole premium. The indenture under which the Notes and the Debentures were issued contains limitations on the incurrence of indebtedness secured by certain liens, and limitations on engaging in certain sale/leaseback transactions and certain merger, consolidation or reorganization transactions. The Notes and Debentures are not subject to any sinking fund requirements. |
|
79
Table of Contents
|
|
The Company has a $250.0 million unsecured revolving credit agreement (the "Credit Agreement") with a syndicate of banks that matures in July 2007. Interest on amounts borrowed under the Credit Agreement is based on LIBOR plus an applicable margin rate (currently .525%), depending on the Company's credit rating. The Company pays a facility fee (currently .225% per annum) on the total $250.0 million commitment, which also is based on the Company's credit rating. In addition, the Company is required to pay a utilization fee of .25% per annum on outstanding advances under the facility if such advances exceed 33% of the total $250.0 million commitment. The Company is required to maintain certain financial covenants under the Credit Agreement, including a specified level of interest coverage, debt ratio and tangible net worth. The Company had no amounts outstanding under the Credit Agreement at December 31, 2004 and 2003. Maturities The aggregate maturities of long-term debt, excluding un-amortized discounts of $2.4 million, for each of the five years subsequent to December 31, 2004, are as follows (in millions): |
| 2005 | $ | 23.0 | |||
| 2006 | 23.0 | ||||
| 2007 | 173.0 | ||||
| 2008 | 23.0 | ||||
| 2009 | 23.0 | ||||
| Thereafter | 287.5 | ||||
| Total | $ | 552.5 | |||
|
The Company is in compliance with the covenants of all of its debt instruments. |
|
Table of Contents
|
|
In connection with the acquisition of Chiles on August 7, 2002, the Company obtained $80.0 million notional amount of outstanding treasury rate lock agreements. Upon closing of the acquisition, the Company designated $65.0 million notional amount of the treasury rate lock agreements as an effective hedge against the variability in cash flows of $76.5 million of MARAD guaranteed bonds that the Company intended to issue in October 2003. The Company deemed the remaining $15.0 million notional amount of treasury rate lock agreements obtained in the Chiles acquisition to be speculative in nature and subsequently settled $10.0 million notional amount in the fourth quarter of 2002 and the final $5.0 million notional amount in the second quarter of 2003. The Company recognized losses of $300,000 and $800,000 for the years ended December 31, 2003 and 2002, respectively, in connection with the decline in fair value of the $15.0 million notional amount of treasury rate lock agreements deemed to be speculative. The change in fair value of the $65.0 million notional amount of treasury rate lock agreements designated as an effective hedge during the years ended December 31, 2003 and 2002 has been included in other comprehensive income, net of tax. The Company settled the $65.0 million notional amount of treasury locks in October 2003 in connection with the pricing and subsequent issuance of the MARAD bonds (see Note 7 "Long Term Debt"). At December 31, 2004 the net unrealized losses on derivative instruments included in accumulated other comprehensive loss totaled $7.9 million and the estimated amount that will be reclassified to earnings during the next twelve months is as follows (in millions): |
| Unrealized losses to be reclassified to interest expense | $ | 1.2 | |
| Unrealized gains to be reclassified to contract drilling expenses | (2.4 | ) | |
| Net unrealized gain to be reclassified to earnings | $ | (1.2 | ) |
|
During the year ended December 31, 2004, a $41,000 loss was included in other, net in the consolidated statement of income to recognize the loss on an ineffective portion of the Company's cash flow hedges. During the year ended December 31, 2004, a $305,000 gain was included in other, net in the consolidated statement of income to recognize the gain on the time value component of the cash flow hedge's gain excluded from the assessment of hedge effectiveness. No portion of the Company's cash flow hedge's gains or losses was excluded from the assessment of hedge effectiveness in 2003 and 2002. No amounts were reclassified to earnings during 2004, 2003 or 2002 in connection with forecasted transactions that were no longer considered likely to occur or as a result of terminated cash flow hedge contracts. At December 31, 2004, the Company had foreign currency exchange contracts outstanding to exchange $87.6 million U.S. dollars for Australian dollars, Great Britain pounds and Euros, all of which mature during the next 15 months. |
|
Table of Contents
|
|
9. COMPREHENSIVE INCOME The components of the Company's comprehensive income for each of the years in the three-year period ended December 31, 2004, are as follows (in millions): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Net Income | $ | 102.8 | $ | 108.3 | $ | 59.3 | |
| Other comprehensive income (loss) | |||||||
| Net change in fair value of derivatives | 2.4 | .3 | (2.6 | ) | |||
| Reclassification of unrealized gains and losses on
derivatives from other comprehensive income (loss) into net income | .1 | .9 | .4 | ||||
| Other | (.6 | ) | -- | -- | |||
| Net other comprehensive income (loss) | 1.9 | 1.2 | (2.2 | ) | |||
| Total comprehensive income | $ | 104.7 | $ | 109.5 | $ | 57.1 | |
|
The components of the accumulated other comprehensive loss section of stockholders' equity at December 31, 2004 and 2003, are as follows (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Cumulative translation adjustment | $ | 1.1 | $ | 1.1 | |
| Net unrealized losses on derivatives, net of tax | 7.9 | 9.8 | |||
| Total accumulated other comprehensive loss | $ | 9.0 | $ | 10.9 | |
|
10. STOCKHOLDERS' EQUITY The Company initiated the payment of a $.025 per share quarterly cash dividend on its common stock during the third quarter of 1997. Cash dividends of $.10 per share were paid in each of the years in the three-year period ended December 31, 2004. On August 7, 2002, the Company issued 13.3 million shares of its common stock, valued at $33.65 per share, or $449.1 million, in connection with the acquisition of Chiles. At December 31, 2004 and 2003, the outstanding shares of the Company's common stock, net of treasury shares, were 151.1 million and 150.5 million, respectively. |
|
82
Table of Contents
|
|
|
| Restricted | Accumulated | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional | Stock | Other | |||||||||||||
| Common Stock | Paid-In | Retained | (Unearned | Comprehensive | Treasury | ||||||||||
| Shares | Amounts | Capital | Earnings | Compensation) | Loss | Stock | |||||||||
| BALANCE, December 31, 2001 | 157,841 | $15.8 | $ 888.6 | $790.2 | $ (5.4 | ) | $ (9.9 | ) | $(239.1 | ) | |||||
| Net income | -- | -- | -- | 59.3 | -- | -- | -- | ||||||||
| Cash dividends paid | -- | -- | -- | (14.2 | ) | -- | -- | -- | |||||||
| Common stock issued under | |||||||||||||||
| employee and director incentive | |||||||||||||||
| plans, net | 1,459 | .1 | 31.7 | -- | (1.3 | ) | -- | (12.0 | ) | ||||||
| Amortization of unearned | |||||||||||||||
| stock compensation | -- | -- | -- | -- | 1.1 | -- | -- | ||||||||
| Common stock issued in | |||||||||||||||
| Chiles acquisition | 13,345 | 1.3 | 459.2 | -- | (.2 | ) | -- | -- | |||||||
| Tax benefit from stock | |||||||||||||||
| compensation | -- | -- | 4.0 | -- | -- | -- | -- | ||||||||
| Net other comprehensive loss | -- | -- | -- | -- | -- | (2.2 | ) | -- | |||||||
| BALANCE, December 31, 2002 | 172,645 | 17.2 | 1,383.5 | 835.3 | (5.8 | ) | (12.1 | ) | (251.1 | ) | |||||
| Net income | -- | -- | -- | 108.3 | -- | -- | -- | ||||||||
| Cash dividends paid | -- | -- | -- | (15.0 | ) | -- | -- | -- | |||||||
| Common stock issued under | |||||||||||||||
| employee and director incentive | |||||||||||||||
| plans, net | 1,269 | .2 | 18.9 | -- | (8.4 | ) | -- | 1.1 | |||||||
| Amortization of unearned | |||||||||||||||
| stock compensation | -- | -- | -- | -- | 1.2 | -- | -- | ||||||||
| Tax benefit from stock | |||||||||||||||
| compensation | -- | -- | 6.6 | -- | -- | -- | -- | ||||||||
| Net other comprehensive income | -- | -- | -- | -- | -- | 1.2 | -- | ||||||||
| BALANCE, December 31, 2003 | 173,914 | 17.4 | 1,409.0 | 928.6 | (13.0 | ) | (10.9 | ) | (250.0 | ) | |||||
| Net income | -- | -- | -- | 102.8 | -- | -- | -- | ||||||||
| Cash dividends paid | -- | -- | -- | (15.1 | ) | -- | -- | -- | |||||||
| Common stock issued under | |||||||||||||||
| employee and director incentive | |||||||||||||||
| plans, net | 628 | .1 | 8.9 | -- | (1.2 | ) | -- | (.4 | ) | ||||||
| Amortization of unearned | |||||||||||||||
| stock compensation | -- | -- | -- | -- | 1.7 | -- | -- | ||||||||
| Tax benefit from stock | |||||||||||||||
| compensation | -- | -- | 2.1 | -- | -- | -- | -- | ||||||||
| Net other comprehensive income | -- | -- | -- | -- | -- | 1.9 | -- | ||||||||
| BALANCE, December 31, 2004 | 174,542 | $17.5 | $1,420.0 | $1,016.3 | $(12.5 | ) | $(9.0 | ) | $(250.4 | ) | |||||
|
83
Table of Contents
|
|
Stock Options In May 1998, the stockholders approved the ENSCO International Incorporated 1998 Incentive Plan (the "1998 Plan"). Under the 1998 Plan, a maximum of 11.3 million shares are reserved for issuance as awards of stock options and restricted stock. Stock options generally become exercisable in 25% increments over a four-year period and to the extent not exercised, expire on the fifth anniversary of the date of grant. In May 1996, the stockholders approved the ENSCO International Incorporated 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, a maximum of 600,000 shares are reserved for issuance as awards of stock options. Options granted under the Directors' Plan become exercisable six months after the date of grant and expire, if not exercised, five years thereafter. The exercise price of stock options granted under the 1998 Plan and the Directors' Plan is the market value of the stock at the date the option is granted. In connection with the acquisition of Chiles on August 7, 2002, the Company assumed Chiles' stock option plan and the outstanding stock options there under. The plan was renamed the ENSCO International Incorporated 2000 Stock Option Plan (the "2000 Plan") and the option awards have been converted to ENSCO common stock equivalents in terms of exercise prices and number of shares exercisable. At the August 7, 2002 plan assumption date, exercise prices of the assumed options ranged from $10.74 per share to $25.48 per share with various expiration dates through February 2012 (6.2 years weighted average remaining contractual life). No further options will be granted under the 2000 Plan and it will be terminated upon the exercise or expiration date of the last outstanding option. At December 31, 2004, options to purchase 38,525 shares of the Company's common stock remained outstanding under the 2000 Plan. |
|
Table of Contents
|
|
|
| 2004 | 2003 | 2002 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted | Weighted | Weighted | |||||||||||
| Average | Average | Average | |||||||||||
| Exercise | Exercise | Exercise | |||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||
| Outstanding at beginning of year | 4,749 | $29.23 | 5,241 | $25.44 | 4,845 | $23.57 | |||||||
| Granted | 1,381 | 27.49 | 1,292 | 29.16 | 1,464 | 30.74 | |||||||
| Assumed in Chiles acquisition | -- | -- | -- | -- | 490 | 17.91 | |||||||
| Exercised | (591 | ) | 13.12 | (1,202 | ) | 10.71 | (1,395 | ) | 21.61 | ||||
| Forfeited | (315 | ) | 32.34 | (582 | ) | 33.16 | (163 | ) | 27.63 | ||||
| Outstanding at end of year | 5,224 | $30.41 | 4,749 | $29.23 | 5,241 | $25.44 | |||||||
| Exercisable at end of year | 2,095 | $32.19 | 1,791 | $26.63 | 1,886 | $19.15 | |||||||
| Weighted average fair value of options granted during the year |
$9.71 | $10.17 | $13.98 | ||||||||||
|
The following table summarizes information about stock options outstanding under the 1998 Plan, Directors' Plan and 2000 Plan at December 31, 2004 (shares in thousands): |
| Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Weighted Average | Number | |||||||||
| Outstanding | Remaining | Weighted Average | Exercisable | Weighted Average | |||||||
| Exercise Prices | at 12/31/04 | Contractual Life | Exercise Price | at 12/31/04 | Exercise Price | ||||||
| $10.74 - $20.91 | 12 | 5.5 years | $15.53 | 12 | $15.53 | ||||||
| 21.59 - 26.92 | 407 | 3.6 years | 25.44 | 122 | 25.65 | ||||||
| 27.03 - 30.66 | 2,413 | 4.0 years | 28.55 | 395 | 29.53 | ||||||
| 31.22 - 33.89 | 2,238 | 1.9 years | 33.01 | 1,417 | 33.25 | ||||||
| 35.19 - 37.86 | 154 | 1.3 years | 35.92 | 149 | 35.86 | ||||||
| 5,224 | 3.0 years | $30.41 | 2,095 | $32.19 | |||||||
|
Table of Contents
|
|
Incentive Stock Grants Key employees, who are in a position to contribute materially to the Company's growth and development and to its long-term success, are eligible for incentive stock grants under the 1998 Plan. Shares of common stock subject to incentive grants generally vest at a rate of 10% per year, as determined by a committee of the Board of Directors. Compensation expense is measured using the market value of the common stock on the date of grant and is recognized on a straight-line basis over the vesting period. A maximum of 1.1 million shares may be issued as incentive stock grants under the 1998 Plan. Incentive stock grants issued during each of the years in the three-year period ended December 31, 2004, were as follows: 60,000 shares at a weighted average fair value of $28.61 per share in 2004, 345,000 shares at a weighted average fair value of $26.50 per share in 2003 and 60,000 shares at a weighted average fair value of $26.82 per share in 2002. At December 31, 2004, there were 502,500 shares of common stock available for incentive stock grants under the 1998 Plan. Incentive stock grants for an aggregate 492,500 shares of common stock issued under the 1998 Plan and a predecessor plan were outstanding at December 31, 2004, and vest as follows: 71,500 shares in 2005, 65,500 shares in 2006, 62,500 shares in 2007, 56,500 shares in 2008, 49,000 shares in 2009, 49,000 shares in 2010, 48,000 shares in 2011, 45,000 shares in 2012, 40,000 shares in 2013 and 5,500 shares in 2014. |
|
Table of Contents
|
|
The Company has a profit sharing plan (the “ENSCO Savings Plan”) which covers eligible employees with more than one year of service, as defined. Profit sharing contributions require Board of Directors approval and may be in cash or grants of the Company's common stock. The Company recorded profit sharing contribution provisions of $3.1 million, $1.6 million and $3.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. The ENSCO Savings Plan includes a 401(k) savings plan feature which allows eligible employees to make tax deferred contributions to the plan. The Company makes matching contributions based on the amount of employee contributions and rates set by the Company's Board of Directors. Matching contributions totaled $4.3 million, $4.9 million and $4.8 million in 2004, 2003 and 2002, respectively. The Company has reserved 1.0 million shares of common stock for issuance as matching contributions under the ENSCO Savings Plan. Supplemental Executive Retirement Plan The ENSCO Supplemental Executive Retirement Plan (the “SERP”) provides a tax deferred savings plan for certain highly compensated employees whose participation in the profit sharing and 401(k) savings plan features of the ENSCO Savings Plan is restricted due to funding and contribution limitations of the Internal Revenue Code. The SERP is a non-qualified plan and eligibility for participation is determined by the Company's Board of Directors. The contribution and Company matching provisions of the SERP are identical to the ENSCO Savings Plan, except that each participant's contributions and matching contributions under the SERP are further limited by contribution amounts under the 401(k) savings plan feature of the ENSCO Savings Plan. Matching contributions totaled $51,000 in 2004, $40,000 in 2003 and $205,000 in 2002. A SERP liability of $6.7 million and $5.1 million is included in other liabilities at December 31, 2004 and 2003, respectively. |
|
Table of Contents
|
|
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Current income tax expense (benefit): | |||||||
| Federal | $ (2.7 | ) | $ (3.9 | ) | $ (8.1 | ) | |
| State | .4 | .2 | .7 | ||||
| Foreign | 14.4 | 17.7 | 26.3 | ||||
| 12.1 | 14.0 | 18.9 | |||||
| Deferred income tax expense (benefit): | |||||||
| Federal | 23.4 | 27.5 | 24.4 | ||||
| Foreign | .5 | 1.6 | (14.5 | ) | |||
| 23.9 | 29.1 | 9.9 | |||||
| Total income tax expense | $36.0 | $43.1 | $28.8 | ||||
|
Table of Contents
|
|
Significant components of deferred income tax assets (liabilities) as of December 31, 2004 and 2003 are comprised of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Deferred tax assets: | |||||
| Net operating loss carryforwards | $ 3.9 | $ 1.4 | |||
| Foreign tax credit carryforwards | 2.7 | 20.5 | |||
| Alternative minimum tax credit carryforwards | 2.6 | 2.6 | |||
| Liabilities not deductible for tax purposes | 9.4 | 7.1 | |||
| Impaired property | -- | .9 | |||
| Other | 3.3 | 2.7 | |||
| Gross deferred tax assets | 21.9 | 35.2 | |||
| Less: Valuation allowance | -- | (.9 | ) | ||
| Deferred tax assets, net of valuation allowance | 21.9 | 34.3 | |||
| Deferred tax liabilities: | |||||
| Property | (361.5 | ) | (344.1 | ) | |
| Intercompany transfers of property | (15.3 | ) | (20.2 | ) | |
| Maritime capital construction fund | -- | (1.1 | ) | ||
| Derivative financial instrument | (1.9 | ) | (2.8 | ) | |
| Other | (2.7 | ) | (2.3 | ) | |
| Total deferred tax liabilities | (381.4 | ) | (370.5 | ) | |
| Net deferred tax liabilities | $(359.5 | ) | $(336.2 | ) | |
| Net current deferred tax asset | $ 12.6 | $ 9.7 | |||
| Net noncurrent deferred tax liability | (372.1 | ) | (345.9 | ) | |
| Net deferred tax liability | $(359.5 | ) | $(336.2 | ) | |
|
In the fourth quarter of 2002, the Company recognized an impairment charge related to the carrying value of its barge rigs located in Venezuela. As a result of the impairment, the tax basis of the barge rigs located in Venezuela exceeded the corresponding financial statement basis, resulting in a deferred tax asset of $900,000 at December 31, 2003. Due to the severe deterioration of the economic and political environment in Venezuela and the uncertainty relative to a recovery of drilling activity, the Company did not expect to realize the benefit of the deferred tax asset and had established a valuation allowance for the full amount of the associated deferred tax asset. The valuation allowance decreased $900,000 from December 31, 2003 to December 31, 2004 as a result of an equal amount of decrease in the associated deferred tax asset. |
|
89
Table of Contents
|
|
The income tax rates imposed in the taxing jurisdictions in which the Company's foreign subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenue, statutory or negotiated deemed profits, or other bases utilized under local tax laws, rather than to net income. In addition, the Company's drilling rigs are frequently moved from one taxing jurisdiction to another. As a result, the Company's consolidated effective income tax rate may vary substantially from year to year, depending on the relative components of the Company's earnings generated in taxing jurisdictions with higher tax rates and lower tax rates. The consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2004, differs from the U.S. statutory income tax rate as follows: |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |
| Foreign taxes | (8.9 | ) | (4.0 | ) | (6.7 | ) | |
| Change in valuation allowance | (.7 | ) | (1.2 | ) | 2.9 | ||
| Other | .4 | (1.5 | ) | .8 | |||
| Effective income tax rate | 25.8 | % | 28.3 | % | 32.0 | % | |
|
At December 31, 2004, the Company had non-expiring foreign net operating loss carryforwards of $10.8 million and $2.3 million in Denmark and Trinidad and Tobago, respectively. In addition, the Company had foreign tax credit carryforwards of $2.7 million available at December 31, 2004. If not utilized, the foreign tax credit carryforwards expire from 2011 through 2014. Undistributed earnings of the Company's foreign subsidiaries, which are permanently reinvested, totaled $900,000 at December 31, 2004. A U.S. deferred tax liability has not been recognized for these undistributed earnings because it is not practicable to estimate. Should the Company make a distribution of these foreign earnings in the form or dividends or otherwise, it may be subject to additional U.S. income taxes. The "American Jobs Creation Act of 2004" became law effective October 22, 2004 and provides for a special one-time dividends received tax deduction on the repatriation of certain foreign earnings to a U.S. tax payer, provided certain criteria are met. The Company is currently analyzing this tax legislation to determine its impact, if any, on the Company's future income tax accounting and consolidated financial statements. |
|
90
Table of Contents
|
|
Leases The Company is obligated under leases for certain of its offices and equipment. Rental expense relating to operating leases was $5.4 million in 2004, $4.6 million in 2003 and $5.6 million in 2002. Future minimum rental payments under the Company's noncancellable operating lease obligations having initial or remaining lease terms in excess of one year are as follows: $5.1 million in 2005; $2.4 million in 2006; $1.8 million in 2007; $700,000 in 2008 and $100,000 in 2009. Hurricane Damage Two of the Company's drilling rigs, the ENSCO 64 jackup rig and ENSCO 25 platform rig, sustained considerable damage during Hurricane Ivan in September 2004. The physical damage to the rigs, as well as the related removal and recovery costs, are covered by insurance, subject to an aggregate escalating deductible of up to $5.5 million. Damage to ENSCO 64 is substantial and an analysis to determine the full extent of such damage has not been completed. It is possible ENSCO 64 will be declared a constructive total loss, as defined by the Company's insurance policies. If this is the case, the loss will not be subject to a deductible and the Company will receive the total rig insured value of $65.0 million, which will result in the recognition of a gain, as the insurance proceeds exceed the $52.8 million carrying value of the rig. If ENSCO 64 is not declared a constructive total loss, the net proceeds received in connection with the insurance claim will likely exceed the net book value of the portion of the rig that is determined to be impaired, which will result in the recognition of a gain equal to the amount of such excess. Repair of the damage to ENSCO 25 is expected to be completed in late February 2005 and a determination of the total damage sustained will be finalized at that time. Due to the uncertainties involved and the amount of time and effort that will be required to fully estimate the damage sustained by the two rigs, the Company has recognized a $5.5 million loss, representing its aggregate insurance deductible. The loss is included in "Other, net" in the consolidated statement of income for the year ended December 31, 2004. Accounts receivable, net at December 31, 2004, includes a $15.5 million insurance receivable for costs incurred in connection with the recovery of ENSCO 64 and the associated analysis of damages. |
|
Table of Contents
|
|
Other Contingencies The Company has been notified that it may be subjected to criminal liability under the U.K. Heath and Safety Executive Act in connection with a fatal injury suffered by an employee on one of its rigs during May 2003. The matter is currently under review by U.K. authorities and the Company has not formally been charged with an offense. Should the Company be charged and criminal liability be established, the Company is subject to a monetary fine. The Company currently believes it has established a sufficient reserve in relation to this matter. In August 2004, the Company and certain subsidiaries were named as defendants in three multi-party lawsuits filed in Mississippi State courts involving numerous other companies as co-defendants. The lawsuits seek an unspecified amount of monetary damages on behalf of approximately 120 named individuals alleging personal injury or death, including claims under the Jones Act, purportedly resulting from exposure to asbestos on drilling rigs and associated facilities during the period 1965 through 1986. The lawsuits are in very preliminary stages and the Company has not determined the number of plaintiffs that were employed by the Company or its subsidiaries or otherwise associated with its drilling operations during the relevant period. The Company intends to vigorously defend against the litigation and, based on information currently available, the Company cannot reasonably estimate a range of possible loss. However, the Company does not expect the resolution of these lawsuits to have a material adverse effect on its financial position, results of operations or cash flows. However, there can be no assurance as to the ultimate outcome of these lawsuits. |
|
Table of Contents
|
|
The Company and its subsidiaries are named defendants in certain lawsuits and are involved from time to time as parties to governmental proceedings, including matters related to taxation, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving the Company and its subsidiaries cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not expect these matters to have a material effect on the financial position, results of operations or cash flows of the Company. 14. SEGMENT INFORMATION In April 2003, the Company completed the sale of its marine transportation fleet (see Note 3 "Discontinued Operations"). The operating results and net carrying value of the marine transportation fleet represent the entire marine transportation services segment as previously reported by the Company. Accordingly, the Company's continuing operations now consist of one reportable segment: contract drilling services. At December 31, 2004, the Company's contract drilling segment owned and operated a fleet of 53 offshore drilling rigs, including 42 jackup rigs, seven barge rigs, three platform rigs and one semisubmersible rig. The Company's operations are concentrated in four geographic regions: North America, Europe/Africa, Asia Pacific and South America/Caribbean. At December 31, 2004, the Company's North America operations consisted of 18 jackup rigs, three platform rigs and one semisubmersible rig, all located in the U.S. waters of the Gulf of Mexico. The Company's Europe/Africa operations consist of eight jackup rigs, seven of which are currently deployed in various territorial waters of the North Sea and one is located offshore Nigeria. In Asia Pacific, the Company's operations currently consist of 15 jackup rigs and one barge rig deployed in various locations. In South America/Caribbean, the Company's operations consist of six barge rigs located in Lake Maracaibo, Venezuela and one jackup rig located offshore Trinidad and Tobago. |
|
93
Table of Contents
|
|
|
| Revenues | Long-lived Assets | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||
| United States | $290.0 | $298.1 | $247.3 | $1,014.7 | $1,050.0 | $1,063.8 | |||||||
| Denmark | 70.8 | 71.8 | 98.6 | 192.7 | 202.1 | 206.5 | |||||||
| United Kingdom | 35.7 | 54.2 | 70.5 | 102.8 | 112.9 | 117.6 | |||||||
| Qatar | 92.5 | 48.5 | 58.8 | 201.5 | 25.3 | 115.2 | |||||||
| Other foreign countries | 279.0 | 308.6 | 166.4 | 919.6 | 826.9 | 754.9 | |||||||
| Total | $768.0 | $781.2 | $641.6 | $2,431.3 | $2,217.2 | $2,258.0 | |||||||
|
15. SUPPLEMENTAL FINANCIAL INFORMATION Consolidated Balance Sheet Information Accounts receivable, net at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Trade | $164.0 | $146.6 | |||
| Insurance receivable | 15.5 | -- | |||
| Other | 6.4 | 5.2 | |||
| 185.9 | 151.8 | ||||
| Allowance for doubtful accounts | (2.9 | ) | (2.4 | ) | |
| $183.0 | $149.4 | ||||
|
Table of Contents
|
|
Prepaid expenses and other current assets at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Prepaid expenses | $17.7 | $17.3 | |||
| Inventory | 2.7 | 4.3 | |||
| Deferred tax asset | 12.5 | 9.7 | |||
| Deferred regulatory certification and compliance costs | 4.0 | 3.8 | |||
| Other | 6.8 | 4.8 | |||
| $43.7 | $39.9 | ||||
|
Other assets, net at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Investment in joint ventures | $23.2 | $53.8 | |||
| Deferred finance costs | 6.7 | 8.1 | |||
| Prepaid taxes on intercompany transfers of property | 12.9 | 8.2 | |||
| Deferred regulatory certification and compliance costs | 3.0 | 4.2 | |||
| Deferred tax asset | 3.2 | -- | |||
| Other | 7.0 | 5.5 | |||
| $56.0 | $79.8 | ||||
|
Table of Contents
|
|
Accrued liabilities at December 31, 2004 and 2003 consists of the following (in millions): |
| 2004 | 2003 | ||||
|---|---|---|---|---|---|
| Personnel | $ 21.6 | $ 22.9 | |||
| Taxes | 62.4 | 64.7 | |||
| Other operating expense | 35.2 | 36.6 | |||
| Capital additions | 30.7 | 13.1 | |||
| Interest | 5.9 | 6.0 | |||
| Deferred and prepaid revenue | 6.3 | 2.4 | |||
| ENSCO 64 salvage and damage assessment | 10.3 | -- | |||
| Other | 4.8 | 2.9 | |||
| $177.2 | $148.6 | ||||
|
Consolidated Statement of Income Information Maintenance and repairs expense related to continuing operations for each of the years in the three-year period ended December 31, 2004 is as follows (in millions): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Maintenance and repairs | $51.6 | $58.2 | $45.9 | ||||
|
Table of Contents
|
|
Consolidated Statement of Cash Flows Information Cash paid for interest and income taxes for each of the years in the three-year period ended December 31, 2004 is as follows (in millions): |
| 2004 | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Interest, net of amounts capitalized | $33.4 | $33.8 | $27.7 | ||||
| Income taxes | 18.0 | 10.9 | 7.2 | ||||
|
Capitalized interest totaled $3.9 million in 2004, $2.0 million in 2003 and $5.1 million in 2002. In connection with the acquisition of Chiles on August 7, 2002, the Company recorded current assets of $29.8 million, property and equipment of $547.9 million, goodwill of $246.5 million, current liabilities of $38.7 million, long-term debt of $153.0 million, other long-term liabilities of $64.6 million, and common stock and additional paid-in capital of $461.8 million. During 2004 and 2003, the Company recorded purchase price adjustments reducing goodwill by $1.7 million and $7.5 million, respectively, primarily related to deferred taxes. Financial Instruments The carrying amounts and estimated fair values of the Company's debt instruments at December 31, 2004 and 2003 are as follows (in millions): |
| 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Estimated | Estimated | ||||||||
| Carrying | Fair | Carrying | Fair | ||||||
| Amount | Value | Amount | Value | ||||||
| 6.75% Notes | $149.7 | $161.6 | $149.6 | $166.5 | |||||
| 7.20% Debentures | 148.5 | 174.7 | 148.5 | 166.8 | |||||
| 4.65% Bonds, including current maturities | 72.0 | 65.3 | 76.5 | 73.8 | |||||
| 6.36% Bonds, including current maturities | 139.4 | 153.1 | 152.0 | 170.8 | |||||
| 5.63% Bonds, including current maturities | 40.5 | 43.2 | 46.3 | 50.6 | |||||
|
Table of Contents
|
|
The estimated fair values of the Company's debt instruments was determined using quoted market prices. The estimated fair value of the Company's cash and cash equivalents, receivables, trade payables and other liabilities approximated their carrying values at December 31, 2004 and 2003. The Company has cash, receivables and payables denominated in currencies other than functional currencies. These financial assets and liabilities create exposure to foreign currency exchange risk. When warranted, the Company hedges such risk by entering into purchase options or futures contracts. The Company does not enter into such contracts for trading purposes or to engage in speculation. The net fair value of such contracts outstanding at December 31, 2004 and 2003 was $4.0 million and $2.0 million, respectively. Concentration of Credit Risk The Company is exposed to credit risk relating to its receivables from customers, its cash and cash equivalents and its use of derivative instruments in connection with the management of interest rate risk and foreign currency risk. The Company minimizes its credit risk relating to receivables from customers, which consist primarily of major and independent oil and gas producers as well as government-owned oil companies, by performing ongoing credit evaluations. The Company also maintains reserves for potential credit losses, which to date have been within management's expectations. The Company minimizes its credit risk relating to cash and investments by focusing on diversification and quality of instruments. Cash balances are maintained in major, highly-capitalized commercial banks. Cash equivalents and investments consist of a portfolio of high-grade instruments. Custody of cash equivalents and investments is maintained at several major financial institutions and the Company monitors the financial condition of those financial institutions. The Company minimizes its credit risk relating to the counterparties to its derivative instruments by transacting with multiple, high-quality counterparties, thereby limiting exposure to individual counterparties, and by monitoring the financial condition of those counterparties. During 2004, no customer provided more than 10% of consolidated revenues. Revenues from one customer exceeded 10% of consolidated revenues in both 2003 and 2002 and were $100.4 million, or 13% of consolidated revenues in 2003, and $90.8 million, or 14% of consolidated revenues in 2002. Revenues from a second customer were $85.6 million, or 11% of consolidated revenues, in 2003. |
|
Table of Contents
|
|
A summary of unaudited quarterly consolidated income statement data for the years ended December 31, 2004 and 2003, is as follows (in millions, except per share amounts): |
| 2004(1) | First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating revenues | $186.5 | $181.4 | $190.9 | $209.2 | $768.0 | ||||||||||||
| Operating expenses | |||||||||||||||||
| Contract drilling | 107.4 | 107.0 | 105.4 | 105.7 | 425.5 | ||||||||||||
| Depreciation and amortization | 35.6 | 36.0 | 36.0 | 36.5 | 144.1 | ||||||||||||
| General and administrative | 5.7 | 7.4 | 6.8 | 6.4 | 26.3 | ||||||||||||
| Operating income | 37.8 | 31.0 | 42.7 | 60.6 | 172.1 | ||||||||||||
| Interest income | .8 | .8 | .9 | 1.2 | 3.7 | ||||||||||||
| Interest expense, net | (10.0 | ) | (9.7 | ) | (8.7 | ) | (8.2 | ) | (36.6 | ) | |||||||
| Other income (expense), net | .5 | 1.0 | (1.2 | ) | 0.0 | .3 | |||||||||||
| Income from continuing operations before | |||||||||||||||||
| income taxes | 29.1 | 23.1 | 33.7 | 53.6 | 139.5 | ||||||||||||
| Provision for income taxes | 7.8 | 5.1 | 8.0 | 15.1 | 36.0 | ||||||||||||
| Income from continuing operations | 21.3 | 18.0 | 25.7 | 38.5 | 103.5 | ||||||||||||
| Income (loss) from discontinued operations | (.3 | ) | (.5 | ) | .1 | -- | (.7 | ) | |||||||||
| Net income | $ 21.0 | $ 17.5 | $ 25.8 | $ 38.5 | $102.8 | ||||||||||||
| Earnings (loss) per share - basic | |||||||||||||||||
| Continuing operations | $ .14 | $ .12 | $ .17 | $ .26 | $ .69 | ||||||||||||
| Discontinued operations | (.00 | ) | (.00 | ) | .00 | -- | (.01 | ) | |||||||||
| $ .14 | $ .12 | $ .17 | $ .26 | $ .68 | |||||||||||||
| Earnings (loss) per share - diluted | |||||||||||||||||
| Continuing operations | $ .14 | $ .12 | $ .17 | $ .26 | $ .69 | ||||||||||||
| Discontinued operations | (.00 | ) | (.00 | ) | .00 | -- | (.01 | ) | |||||||||
| $ .14 | $ .12 | $ .17 | $ .26 | $ .68 | |||||||||||||
|
Table of Contents
|
| 2003(1)(2) | First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating revenues | $192.9 | $194.3 | $197.3 | $196.7 | $781.2 | ||||||||||||
| Operating expenses | |||||||||||||||||
| Contract drilling | 109.5 | 109.0 | 112.8 | 113.9 | 445.2 | ||||||||||||
| Depreciation and amortization | 31.8 | 32.6 | 32.6 | 33.2 | 130.2 | ||||||||||||
| General and administrative | 5.9 | 4.8 | 5.2 | 6.1 | 22.0 | ||||||||||||
| Operating income | 45.7 | 47.9 | 46.7 | 43.5 | 183.8 | ||||||||||||
| Interest income | .7 | .9 | .9 | .9 | 3.4 | ||||||||||||
| Interest expense, net | (9.2 | ) | (9.1 | ) | (8.9 | ) | (9.5 | ) | (36.7 | ) | |||||||
| Other income (expense), net | .2 | (1.4 | ) | .8 | 2.1 | 1.7 | |||||||||||
| Income from continuing operations before | |||||||||||||||||
| income taxes | 37.4 | 38.3 | 39.5 | 37.0 | 152.2 | ||||||||||||
| Provision for income taxes | 10.7 | 10.9 | 11.3 | 10.2 | 43.1 | ||||||||||||
| Income from continuing operations | 26.7 | 27.4 | 28.2 | 26.8 | 109.1 | ||||||||||||
| Income (loss) from discontinued operations | (3.8 | ) | 3.7 | (.4 | ) | (.3 | ) | (.8 | ) | ||||||||
| Net income | $ 22.9 | $ 31.1 | $ 27.8 | $ 26.5 | $108.3 | ||||||||||||
| Earnings (loss) per share - basic | |||||||||||||||||
| Continuing operations | $ .18 | $ .18 | $ .19 | $ .18 | $ .73 | ||||||||||||
| Discontinued operations | (.03 | ) | .03 | (.00 | ) | (.00 | ) | (.01 | ) | ||||||||
| $ .15 | $ .21 | $ .19 | $ .18 | $ .72 | |||||||||||||
| Earnings (loss) per share - diluted | |||||||||||||||||
| Continuing operations | $ .18 | $ .18 | $ .19 | $ .18 | $ .73 | ||||||||||||
| Discontinued operations | (.03 | ) | .03 | (.00 | ) | (.00 | ) | (.01 | ) | ||||||||
| $ .15 | $ .21 | $ .19 | $ .18 | $ .72 | |||||||||||||
| (1) | In May 2004, the Company transferred three rigs (ENSCO 23, ENSCO 24 and ENSCO 55) to KFELS as partial payment for the construction of a new high performance premium jackup rig to be named ENSCO 107. The results of operations of ENSCO 23, ENSCO 24 and ENSCO 55 have been reclassified as discontinued operations for the unaudited quarterly consolidated income statement data for 2004 and 2003. | |
(2) |
In April 2003, the Company sold its 27-vessel marine transportation fleet, which represented the entire marine transportation services segment previously reported by the Company. The results of operations of the marine transportation services segment have been reclassified as discontinued operations for the unaudited quarterly consolidated income statement data for 2003. |
|
Table of Contents
|
|
Table of Contents
|
|
102
Table of Contents
|
| Number of securities | |||||||
|---|---|---|---|---|---|---|---|
| remaining available for | |||||||
| Number of securities | future issuance under | ||||||
| to be issued upon | Weighted-average | equity compensation | |||||
| exercise of | exercise price of | plans (excluding | |||||
| outstanding options, | outstanding options, | securities reflected in | |||||
| Plan category | warrants and rights | warrants and rights | column (a)) | ||||
| (a) | (b) | (c) | |||||
| Equity compensation plans approved by security holders |
5,185,030 |
$30.47 |
3,769,664 | ||||
| Equity compensation plans not approved by security holders* |
38,525 |
$22.51 |
-- | ||||
| Total | 5,223,555 | $30.41 | 3,769,664 | ||||
| * | In connection with the acquisition of Chiles Offshore Inc. ("Chiles") on August 7, 2002, the Company assumed Chiles' stock option plan and the outstanding stock options thereunder. At December 31, 2004, options to purchase 38,525 shares of the Company's common stock, at a weighted-average exercise price of $22.51 per share, were outstanding under this plan. No shares of the Company's common stock are available for future issuance under this plan, no further options will be granted under this plan and the plan will be terminated upon the earlier of the exercise or expiration date of the last outstanding option. | ||
|
103
Table of Contents
|
| Additional information required by this item is included in the Proxy Statement and is incorporated herein by reference. |
|
Table of Contents
|
|
PART IV |
| Item 15. Exhibits and Financial Statement Schedules |
| (a) | Financial statement schedules of ENSCO International Incorporated |
| Report of Independent Registered Public Accounting Firm | 58 |
| Consolidated Statements of Income | 59 |
| Consolidated Balance Sheets | 60 |
| Consolidated Statements of Cash Flows | 61 |
| Notes to Consolidated Financial Statements | 62 | ||
| (b) | Exhibits |
| The following instruments are included as exhibits to this Report. Exhibits incorporated by reference are so indicated by parenthetical information. | |||
|
Table of Contents
|
| Exhibit No. | Document |
| 3.1 | - | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 1-8097). |
| 3.2 | - | Revised and Restated Bylaws of the Company, effective November 9, 2004 (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated November 9, 2004, File No. 1-8097). |
| 4.1 | - | Certificate of Designation of Series A Junior Participating Preferred Stock of the Company (incorporated by reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995, File No. 1-8097). |
| 4.2 | - | Indenture, dated November 20, 1997, between the Company and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated November 24, 1997, File No. 1-8097). |
| 4.3 | - | First Supplemental Indenture, dated November 20, 1997, between the Company and Bankers Trust Company, as trustee, supplementing the Indenture dated as of November 20, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated November 24, 1997, File No. 1-8097). |
| 4.4 | - | Form of Note (incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated November 24, 1997, File No. 1-8097). |
| 4.5 | - | Form of Debenture (incorporated by reference to Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated November 24, 1997, File No. 1-8097). |
|
Table of Contents
|
| 10.1 | - | ENSCO International Incorporated 1993 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097). |
| 10.2 | - | ENSCO International Incorporated 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 filed August 23, 1996, Registration No. 333-10733). |
| 10.3 | - | Amendment to ENSCO International Incorporated Incentive Plan, dated November 11, 1997 (incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-8097). |
| 10.4 | - | ENSCO International Incorporated Savings Plan, as revised and restated (incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-8097). |
| 10.5 | - | Indemnification Agreement between the Company and its officers and directors (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-8097). |
| 10.6 | - | ENSCO International Incorporated 1998 Incentive Plan (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 filed on July 7, 1998, Registration No. 333-58625). |
| 10.7 | - | Bond Purchase Agreement of ENSCO Offshore Company dated January 22, 2001, concerning $190,000,000 of United States Government Guaranteed Ship Financing Obligations (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 1-8097). |
|
107
Table of Contents
|
| 10.8 | - | United States Government Guaranteed Ship Financing Bond issued by ENSCO Offshore Company dated January 25, 2001 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 1-8097). |
| 10.9 | - | Supplement No.1, dated January 25, 2001, to the Trust Indenture dated December 15, 1999, between ENSCO Offshore Company and Bankers Trust Company (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 1-8097). |
| 10.10 | - | Ratification of Guaranty by ENSCO International Incorporated in favor of the United States of America dated January 25, 2001 and associated Guaranty Agreement by ENSCO International Incorporated in favor of the United States of America dated December 15, 1999 (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, File No. 1-8097). |
| 10.11 | - | ENSCO International Incorporated 2000 Stock Option Plan (formerly known as the Chiles Offshore Inc. 2000 Stock Option Plan) (incorporated by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-8 filed August 7, 2002, Registration No. 333-97757). |
| 10.12 | - | Amendment No. 1 to the ENSCO International Incorporated 2000 Stock Option Plan (incorporated by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-8 filed August 7, 2002, Registration No. 333-97757). |
| 10.13 | - | Amendment No. 2 to the ENSCO International Incorporated 2000 Stock Option Plan (incorporated by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-8 filed August 7, 2002, Registration No. 333-97757). |
| 10.14 | - | Credit Agreement among ENSCO International Incorporated, Den Norske Bank ASA, New York Branch as Administrative Agent, Citibank, N.A. as Syndication Agent, Wells Fargo Bank Texas, N.A. as Co-Syndication Agent, and HSBC Bank USA as Documentation Agent concerning a $250,000,000 Revolving Credit Loan, dated as of July 26, 2002 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 1-8097). |
|
108
Table of Contents
|
| 10.15 | - | Amendment No. 3 to the ENSCO International Incorporated 2000 Stock Option Plan (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). |
| 10.16 | - | Amendment to the ENSCO International Incorporated 1998 Incentive Plan (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). |
| 10.17 | - | Amendment to the ENSCO International Incorporated 1993 Incentive Plan, as amended (incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). |
| 10.18 | - | Amendment to the ENSCO International Incorporated 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). |
| 10.19 | - | ENSCO Non-Employee Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). |
| 10.20 | - | ENSCO Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2004 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). |
| 10.21 | - | ENSCO Supplemental Executive Retirement Plan and Non-Employee Director Deferred Compensation Plan Trust Agreement, as revised and restated effective January 1, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). |
| 10.22 | - | ENSCO International Incorporated Key Employees' Incentive Compensation Plan, as revised and restated effective January 1, 2003 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-8097). |
|
109
Table of Contents
|
| 10.23 | - | ENSCO 2005 Supplemental Executive Retirement Plan, effective January 1, 2005 (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). |
| 10.24 | - | ENSCO 2005 Non-Employee Director Deferred Compensation Plan, effective January 1, 2005 (incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). |
| 10.25 | - | ENSCO 2005 Benefit Reserve Trust, effective January 1, 2005 (incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). |
| *21.1 | - | Subsidiaries of the Registrant. |
| *23.1 | - | Consent of Independent Registered Public Accounting Firm. |
| *31.1 | - | Certification of the Chief Executive Officer of Registrant pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| *31.2 | - | Certification of the Chief Financial Officer of Registrant pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| *32.1 | - | Certification of the Chief Executive Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| *32.2 | - | Certification of the Chief Financial Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * Filed herewith |
|
Table of Contents
|
| Executive Compensation Plans and Arrangements |
| The following is a list of all executive compensation plans and arrangements required to be filed as an exhibit to this Form 10-K: |
| 1. | ENSCO International Incorporated 1993 Incentive Plan, as amended (filed as Exhibit 10.1 hereto and incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8097). | |
| 2. | ENSCO International Incorporated 1996 Non-Employee Directors Stock Option Plan (filed as Exhibit 10.2 hereto and incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement Form S-8 filed August 23, 1996, Registration No. 333-10733). | |
| 3. | Amendment to ENSCO International Incorporated Incentive Plan, dated November 11, 1997 (filed as Exhibit 10.3 hereto and incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-8097). | |
| 4. | ENSCO International Incorporated 1998 Incentive Plan (filed as Exhibit 10.6 hereto and incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 filed on July 7, 1998, Registration No. 333-58625). | |
| 5. | Amendment to the ENSCO International Incorporated 1998 Incentive Plan (filed as Exhibit 10.16 hereto and incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). | |
|
Table of Contents
|
| 6. | Amendment to the ENSCO International Incorporated 1996 Non-Employee Directors Stock Option Plan (filed as Exhibit 10.18 hereto and incorporated by reference to Exhibit 10.21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). | |
| 7. | Amendment to the ENSCO International Incorporated 1993 Incentive Plan, as amended (filed as Exhibit 10.17 hereto and incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-8097). | |
| 8. | ENSCO Non-Employee Director Deferred Compensation Plan (filed as Exhibit 10.19 hereto and incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). | |
| 9. | ENSCO Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2004 (filed as Exhibit 10.20 hereto and incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). | |
| 10. | ENSCO Supplemental Executive Retirement Plan and Non-Employee Director Deferred Compensation Plan Trust Agreement, as revised and restated effective January 1, 2004 (filed as Exhibit 10.21 hereto and incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-8097). | |
| 11. | ENSCO International Incorporated Key Employees' Incentive Compensation Plan, as revised and restated effective January 1, 2003 (filed as Exhibit 10.22 hereto and incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-8097). |
|
Table of Contents
|
| 12. | ENSCO 2005 Supplemental Executive Retirement Plan, effective January 1, 2005 (filed as Exhibit 10.23 hereto and incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). | |
| 13. | ENSCO 2005 Non-Employee Director Deferred Compensation Plan, effective January 1, 2005 (filed as Exhibit 10.24 hereto and incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). | |
| 14. | ENSCO 2005 Benefit Reserve Trust, effective January 1, 2005 (filed as Exhibit 10.25 hereto and incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated January 5, 2005, File No. 1-8097). |
| The Company will furnish to the Securities and Exchange Commission upon request, all constituent instruments defining the rights of holders of long-term debt of the Company not filed herewith as permitted by paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K. |
| (c) | Excluded Financial Statements |
| None. | |||
|
Table of Contents
|
| ENSCO International Incorporated (Registrant) | ||
| By /s/
CARL F. THORNE
Carl F. Thorne Chairman of the Board and Chief Executive Officer |
| Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. |
| Signatures | Title | Date | ||
| /s/ J. W. SWENT
J. W. Swent |
Senior Vice President - Chief Financial Officer |
February 23, 2005 | ||
| /s/ H. E. MALONE, JR.
H. E. Malone, Jr. |
Vice President - Finance | February 23, 2005 | ||
| /s/ DAVID A. ARMOUR
David A. Armour |
Controller | February 23, 2005 | ||
| /s/ DAVID M. CARMICHAEL David M. Carmichael |
Director | February 23, 2005 | ||
| /s/ GERALD W. HADDOCK
Gerald W. Haddock |
Director | February 23, 2005 | ||
| /s/ THOMAS L. KELLY II
Thomas L. Kelly II |
Director | February 23, 2005 | ||
| /s/ MORTON H. MEYERSON Morton H. Meyerson |
Director | February 23, 2005 | ||
| /s/ RITA M. RODRIGUEZ Rita M. Rodriguez |
Director | February 23, 2005 | ||
| /s/ PAUL E. ROWSEY, III
Paul E. Rowsey, III |
Director | February 23, 2005 | ||
| /s/ JOEL V. STAFF
Joel V. Staff |
Director | February 23, 2005 | ||
|
114 |