Attached files
file | filename |
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EX-31.2 - EX-31.2 - DIAMOND OFFSHORE DRILLING, INC. | h67774exv31w2.htm |
EX-32.1 - EX-32.1 - DIAMOND OFFSHORE DRILLING, INC. | h67774exv32w1.htm |
EX-31.1 - EX-31.1 - DIAMOND OFFSHORE DRILLING, INC. | h67774exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
Delaware | 76-0321760 | |
(State or other jurisdiction of incorporation | (I.R.S. Employer | |
or organization) | Identification No.) |
15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrants telephone number, including area code)
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
As of October 23, 2009 Common stock, $0.01 par value per share 139,010,857 shares
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2009
PAGE NO. | ||||||||
COVER PAGE |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 250,821 | $ | 336,052 | ||||
Marketable securities |
880 | 400,592 | ||||||
Accounts receivable, net of provision for bad debts |
764,639 | 574,842 | ||||||
Prepaid expenses and other current assets |
170,246 | 123,046 | ||||||
Assets held for sale |
32,201 | 32,201 | ||||||
Total current assets |
1,218,787 | 1,466,733 | ||||||
Drilling and other property and equipment, net of accumulated depreciation |
4,402,130 | 3,414,373 | ||||||
Other assets |
94,541 | 73,325 | ||||||
Total assets |
$ | 5,715,458 | $ | 4,954,431 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 58,004 | $ | 93,982 | ||||
Accrued liabilities |
298,238 | 329,526 | ||||||
Taxes payable |
47,746 | 85,579 | ||||||
Current portion of long-term debt |
4,143 | | ||||||
Total current liabilities |
408,131 | 509,087 | ||||||
Long-term debt |
998,603 | 503,280 | ||||||
Deferred tax liability |
521,767 | 462,026 | ||||||
Other liabilities |
154,175 | 118,553 | ||||||
Total liabilities |
2,082,676 | 1,592,946 | ||||||
Commitments and contingencies (Note 10) |
| | ||||||
Stockholders equity: |
||||||||
Common stock (par value $0.01, 500,000,000 shares authorized,
143,926,385 shares issued and 139,009,585 shares outstanding
at September 30, 2009 and 143,917,850 shares issued and
139,001,050 shares outstanding at December 31, 2008) |
1,439 | 1,439 | ||||||
Additional paid-in capital |
1,962,285 | 1,957,041 | ||||||
Retained earnings |
1,779,697 | 1,516,908 | ||||||
Accumulated other comprehensive gain |
3,774 | 510 | ||||||
Treasury stock, at cost (4,916,800 shares at September 30,
2009 and December 31, 2008) |
(114,413 | ) | (114,413 | ) | ||||
Total stockholders equity |
3,632,782 | 3,361,485 | ||||||
Total liabilities and stockholders equity |
$ | 5,715,458 | $ | 4,954,431 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Contract drilling |
$ | 885,281 | $ | 881,953 | $ | 2,664,447 | $ | 2,588,919 | ||||||||
Revenues related to reimbursable expenses |
23,094 | 18,423 | 76,055 | 51,931 | ||||||||||||
Total revenues |
908,375 | 900,376 | 2,740,502 | 2,640,850 | ||||||||||||
Operating expenses: |
||||||||||||||||
Contract drilling |
304,146 | 314,273 | 906,746 | 872,716 | ||||||||||||
Reimbursable expenses |
22,873 | 18,126 | 75,019 | 50,660 | ||||||||||||
Depreciation |
86,485 | 72,155 | 256,978 | 212,150 | ||||||||||||
General and administrative |
15,628 | 13,944 | 48,109 | 45,434 | ||||||||||||
Gain on disposition of assets |
(217 | ) | (228 | ) | (365 | ) | (505 | ) | ||||||||
Casualty loss |
| 6,281 | | 6,281 | ||||||||||||
Total operating expenses |
428,915 | 424,551 | 1,286,487 | 1,186,736 | ||||||||||||
Operating income |
479,460 | 475,825 | 1,454,015 | 1,454,114 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
1,879 | 3,055 | 3,645 | 10,369 | ||||||||||||
Interest expense |
(14,031 | ) | (2,989 | ) | (26,436 | ) | (6,226 | ) | ||||||||
Foreign currency transaction gain (loss) |
8,313 | (29,047 | ) | 17,921 | (14,606 | ) | ||||||||||
Other, net |
(336 | ) | 581 | 315 | 333 | |||||||||||
Income before income tax expense |
475,285 | 447,425 | 1,449,460 | 1,443,984 | ||||||||||||
Income tax expense |
(111,151 | ) | (136,892 | ) | (349,305 | ) | (426,780 | ) | ||||||||
Net income |
$ | 364,134 | $ | 310,533 | $ | 1,100,155 | $ | 1,017,204 | ||||||||
Income per share: |
||||||||||||||||
Basic |
$ | 2.62 | $ | 2.23 | $ | 7.91 | $ | 7.32 | ||||||||
Diluted |
$ | 2.62 | $ | 2.23 | $ | 7.91 | $ | 7.31 | ||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Shares of common stock |
139,005 | 139,001 | 139,003 | 138,945 | ||||||||||||
Dilutive potential shares of common stock |
98 | 90 | 80 | 131 | ||||||||||||
Total weighted-average shares outstanding |
139,103 | 139,091 | 139,083 | 139,076 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Operating activities: |
||||||||
Net income |
$ | 1,100,155 | $ | 1,017,204 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation |
256,978 | 212,150 | ||||||
(Gain) on disposition of assets |
(365 | ) | (505 | ) | ||||
Casualty loss |
| 6,281 | ||||||
(Gain) on sale of marketable securities, net |
(619 | ) | (674 | ) | ||||
(Gain) loss on foreign currency forward exchange contracts |
(11,852 | ) | 7,920 | |||||
Deferred tax provision |
57,984 | 33,862 | ||||||
Accretion of discounts on marketable securities |
(631 | ) | (1,631 | ) | ||||
Amortization/write-off of debt issuance costs |
466 | 416 | ||||||
Amortization of debt discounts |
211 | 181 | ||||||
Stock-based compensation expense |
4,824 | 4,570 | ||||||
Excess tax benefits from stock-based payment arrangements |
| (1,392 | ) | |||||
Deferred income, net |
70,340 | 11,119 | ||||||
Deferred expenses, net |
(21,195 | ) | (21,842 | ) | ||||
Other items, net |
10,757 | 6,944 | ||||||
Proceeds from settlement of foreign currency forward exchange contracts
designated as accounting hedges |
3,046 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(198,131 | ) | (184,300 | ) | ||||
Prepaid expenses and other current assets |
(15,524 | ) | (17,085 | ) | ||||
Accounts payable and accrued liabilities |
(54,881 | ) | (33,833 | ) | ||||
Taxes payable |
(65,131 | ) | (60 | ) | ||||
Net cash provided by operating activities |
1,136,432 | 1,039,325 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(309,737 | ) | (487,662 | ) | ||||
Rig acquisitions |
(950,024 | ) | | |||||
Proceeds from disposition of assets, net of disposal costs |
1,391 | 2,802 | ||||||
Deposits received on sale of rig |
6,000 | | ||||||
Proceeds from sale and maturities of marketable securities |
4,098,868 | 1,293,742 | ||||||
Purchases of marketable securities |
(3,698,627 | ) | (1,291,271 | ) | ||||
(Cost of) proceeds from settlement of foreign currency forward exchange
contracts not designated as accounting hedges |
(28,772 | ) | 11,141 | |||||
Net cash used in investing activities |
(880,901 | ) | (471,248 | ) | ||||
Financing activities: |
||||||||
Issuance of 5.875% senior unsecured notes |
499,255 | | ||||||
Debt issuance costs and arrangement fees |
(3,923 | ) | | |||||
Payment of dividends |
(836,621 | ) | (573,917 | ) | ||||
Proceeds from stock plan exercises |
527 | 2,002 | ||||||
Excess tax benefits from stock-based payment arrangements |
| 1,392 | ||||||
Redemption of 1.5% debentures |
| (73 | ) | |||||
Net cash used in financing activities |
(340,762 | ) | (570,596 | ) | ||||
Net change in cash and cash equivalents |
(85,231 | ) | (2,519 | ) | ||||
Cash and cash equivalents, beginning of period |
336,052 | 637,961 | ||||||
Cash and cash equivalents, end of period |
$ | 250,821 | $ | 635,442 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The unaudited consolidated financial statements of Diamond Offshore Drilling, Inc. and
subsidiaries, which we refer to as Diamond Offshore, we, us or our, should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 (File No.
1-13926).
As of October 23, 2009, Loews Corporation, or Loews, owned 50.4% of the outstanding shares of
our common stock.
Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the U.S., or GAAP, for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission, or SEC. Accordingly, pursuant to such rules and regulations,
they do not include all disclosures required by GAAP for complete financial statements. The
consolidated financial information has not been audited but, in the opinion of management, includes
all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of
the consolidated balance sheets, statements of operations and statements of cash flows at the dates
and for the periods indicated. Results of operations for interim periods are not necessarily
indicative of results of operations for the respective full years.
Our management has evaluated subsequent events through the time of our filing with the SEC on
October 27, 2009, the date on which we issued our financial statements.
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, or SFAS 168.
SFAS 168 established the FASB Accounting Standards Codification, or FASB ASC,
as the source of authoritative GAAP recognized by the FASB for non-governmental entities.
All existing accounting standards have been superseded and accounting literature not included
in the FASB ASC is considered non-authoritative. Subsequent issuances of new standards will be
in the form of Accounting Standards Updates, or ASU, that will be included in the ASC. Generally,
the FASB ASC is not expected to change GAAP. Pursuant to the adoption of SFAS 168 we have
adjusted references to authoritative accounting literature in our financial statements.
Adoption of FAS 168 had no effect our financial position, operating results or cash flows.
Adoption of ASC 470-20
We adopted FASB ASC Topic 470-20, Debt with Conversion and Other Options, or ASC 470-20 (previously
FASB Staff Position, or FSP, Accounting
Principles Board No. 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (including Partial Cash Settlement)), on January
1, 2009. ASC 470-20 applies to convertible debt securities that may be settled by the issuer
fully or partially in cash and requires that the statement be retrospectively applied to all past
periods presented. For convertible debt securities falling within the scope of ASC 470-20,
issuers must separate the securities into two components: debt and equity. The proceeds of the
issuance are first allocated to the debt based on the estimated fair value of a similar debt issue
without a conversion option; the remaining proceeds are allocated to equity.
Both our Zero Coupon Convertible Debentures due 2020, or Zero Coupon Debentures, and our 1.5%
Convertible Senior Debentures Due 2031, or 1.5% Debentures, are within the scope of ASC 470-20.
Consequently, we retrospectively applied the requirements of the pronouncement to both of these
issuances. The effect of adoption on our Consolidated Balance Sheets is as follows:
Zero Coupon Debentures | 1.5% Debentures | Total | ||||||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Increase (Decrease): |
||||||||||||||||||||||||
Drilling and other
property and
equipment, net |
$ | 6,169 | $ | 6,429 | $ | 8,949 | $ | 9,240 | $ | 15,118 | $ | 15,669 | ||||||||||||
Deferred tax liability |
1,033 | 1,080 | 1,693 | 1,741 | 2,726 | 2,821 | ||||||||||||||||||
Additional paid-in
capital |
48,997 | 48,997 | 62,701 | 62,701 | 111,698 | 111,698 | ||||||||||||||||||
Retained earnings |
(43,861 | ) | (43,648 | ) | (55,445 | ) | (55,202 | ) | (99,306 | ) | (98,850 | ) |
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The effect of the adoption of ASC 470-20 on our Consolidated Statements of Operations is as
follows:
Zero Coupon Debentures | 1.5% Debentures | Total | ||||||||||||||||||||||||||||||||||||||||||||||
September 30 | September 30 | September 30 | ||||||||||||||||||||||||||||||||||||||||||||||
Three Months | Nine Months | Three Months | Nine Months | Three Months | Nine Months | |||||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease): |
||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation expense |
$ | 87 | $ | 68 | $ | 260 | $ | 208 | $ | 97 | $ | 73 | $ | 291 | $ | 217 | $ | 184 | $ | 141 | $ | 551 | $ | 425 | ||||||||||||||||||||||||
Tax expense |
(16 | ) | (12 | ) | (47 | ) | (36 | ) | (16 | ) | (12 | ) | (48 | ) | (35 | ) | (32 | ) | (24 | ) | (95 | ) | (71 | ) | ||||||||||||||||||||||||
Income from
continuing
operations |
(71 | ) | (56 | ) | (213 | ) | (172 | ) | (81 | ) | (61 | ) | (243 | ) | (182 | ) | (152 | ) | (117 | ) | (456 | ) | (354 | ) | ||||||||||||||||||||||||
Net income |
(71 | ) | (56 | ) | (213 | ) | (172 | ) | (81 | ) | (61 | ) | (243 | ) | (182 | ) | (152 | ) | (117 | ) | (456 | ) | (354 | ) |
Debt discounts related to our Zero Coupon Debentures and 1.5% Debentures were fully
amortized in 2005 and 2007, respectively. Consequently, the adoption of ASC 470-20 had no effect
on the carrying amount of our Zero Coupon Debentures at September 30, 2009 and December 31, 2008.
Our then outstanding 1.5% Debentures were redeemed in full in April 2008.
The carrying amounts of the liability and equity components of the debentures at September 30,
2009 and December 31, 2008 is as follows:
Zero Coupon Debentures | 1.5% Debentures | Total | ||||||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Carrying
amount of
liability
component of
debt issue |
$ | 4,143 | $ | 4,036 | $ | | $ | | $ | 4,143 | $ | 4,036 | ||||||||||||
Carrying amount
of equity
component of
debt issue |
$ | 48,997 | $ | 48,997 | $ | 62,701 | $ | 62,701 | $ | 111,698 | $ | 111,698 |
Interest expense (net of capitalized interest) for our Zero Coupon Debentures related to
the contractual coupon rate was $37,000 and $14,000 for the three months ended September 30, 2009
and 2008, respectively, with an effective interest rate of 3.63% in each period. Interest expense
(net of capitalized interest) for our Zero Coupon Debentures related to the contractual coupon rate
was $108,000 and $26,000 for the nine months ended September 30, 2009 and 2008, respectively, with
an effective interest rate of 3.63% in each period. Interest expense (net of capitalized interest)
for the 1.5% Debentures related to the contractual coupon interest rate was $24,000 for the nine
months ended September 30, 2008. The effective interest rate for the 1.5% Debentures was 1.6% for
the nine months ended September 30, 2008. There was no interest expense (net of capitalized
interest) for the three months ended September 30, 2008 as the 1.5% Debentures were redeemed in
April 2008. See Note 9.
The adoption of ASC 470-20 had no effect on previously stated basic and diluted earnings per
share for the three months ended September 30, 2008. The adoption of ASC 470-20 resulted in a
$0.01 per share decline in basic and diluted earning per share for the nine months ended September
30, 2008, from $7.32 per share to $7.31 per share. As required, our consolidated financial
statements and notes thereto have been adjusted to reflect the effect of adoption of ASC 470-20
on January 1, 2009.
Other Reclassifications
Certain amounts applicable to the prior periods have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect earnings.
Cash and Cash Equivalents, Marketable Securities
We consider short-term, highly liquid investments that have an original maturity of three
months or less and deposits in money market mutual funds that are readily convertible into cash to
be cash equivalents. See Note 5.
We classify our investments in marketable securities as available for sale and they are stated
at fair value in our Consolidated Balance Sheets. Accordingly, any unrealized gains and losses,
net of taxes, are reported in our Consolidated Balance Sheets in Accumulated other comprehensive
gains (losses) until realized. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity and such adjustments are included in our
Consolidated Statements of Operations in Interest income. The sale and purchase of securities are
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recorded on the date of the trade. The cost of debt securities sold is based on the specific
identification method. Realized gains or losses, as well as any declines in value that are judged
to be other than temporary, are reported in our Consolidated Statements of Operations in Other,
net.
Fair Value of Financial Instruments
We believe that the carrying amount of our current financial instruments approximates fair
value because of the short maturity of these instruments. For non-current financial instruments we
use quoted market prices, when available, and discounted cash flows to estimate fair value.
We have adopted
FASB ASC Topic 825-10-65, Financial Instruments Transition Related to FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (previously
FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments,) which requires disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial statements. See Note 5.
Supplementary Cash Flow Information
We paid interest on long-term debt totaling $25.1 million in each of the nine-month periods
ended September 30, 2009 and 2008.
We made estimated U.S. federal income tax payments of $192.0 million and $330.0 million during
the nine months ended September 30, 2009 and 2008, respectively. We paid $141.4 million and $86.0
million in foreign income taxes, net of foreign tax refunds, during the nine months ended September
30, 2009 and 2008, respectively. We paid state income taxes of $0.2 million during the nine months
ended September 30, 2009.
Capital expenditures for the nine months ended September 30, 2009 included $59.4 million that
was accrued but unpaid at December 31, 2008. Capital expenditures for the nine months ended
September 30, 2008 included $43.0 million that was accrued but unpaid at December 31, 2007.
Capital expenditures that were accrued but not paid as of September 30, 2009 totaled $45.4 million.
We have included this amount in Accrued liabilities in our Consolidated Balance Sheets at
September 30, 2009.
We recorded income tax benefits of $32,000 and $1.7 million related to employee stock plan
exercises during the nine months ended September 30, 2009 and 2008, respectively.
Capitalized Interest
We capitalize interest cost for the construction and upgrade of qualifying assets. There were
no qualifying expenditures during the nine months ended September 30, 2009. During the nine months
ended September 30, 2008, we capitalized interest on qualifying expenditures related to the upgrade
of the Ocean Monarch for ultra-deepwater service (completed December 2008) and the construction of
our two jack-up rigs, the Ocean Shield (completed May 2008) and the Ocean Scepter (completed August
2008).
A reconciliation of our total interest cost to Interest expense as reported in our
Consolidated Statements of Operations is as follows:
Three | ||||||||
Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2008 | ||||||||
(In thousands) | ||||||||
Total interest cost including amortization of debt issuance costs |
$ | 6,942 | $ | 20,993 | ||||
Capitalized interest |
(3,953 | ) | (14,767 | ) | ||||
Total interest expense as reported |
$ | 2,989 | $ | 6,226 | ||||
Assets Held For Sale
At December 31, 2008, we had transferred the $32.2 million net book value of the Ocean Tower
to Assets held for sale in our Consolidated Balance Sheets. In December 2008, we entered into an
agreement to sell the rig, which was damaged during a hurricane in September 2008, at a price in
excess of its $32.2 million carrying value. In connection with the execution of the sales
agreement, and amendments thereto, we received $9.5 million in aggregate deposits ($3.5 million in
2008 and $6.0 million in 2009) from the purchaser, which we have recorded in
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Accrued liabilities in our Consolidated Balance Sheets. We completed the sale on
October 26, 2009.
Impairment of Long-Lived Assets
We evaluate our property and equipment for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We utilize a
probability-weighted cash flow analysis in testing an asset for potential impairment. Our
assumptions and estimates underlying this analysis include the following:
| dayrate by rig; |
| utilization rate by rig (expressed as the actual percentage of time per year that the rig would be used); |
| the per day operating cost for each rig if active, ready-stacked or cold-stacked; and |
| salvage value for each rig. |
Based on these assumptions and estimates, we develop a matrix by assigning probabilities to various
combinations of assumed utilization rates and dayrates.
As of June 30, 2009, we evaluated the Ocean Tower and our three mat-supported jack-up rigs
(Ocean Champion, Ocean Crusader and Ocean Drake), which had been cold-stacked during the second
quarter of 2009, for impairment. The Ocean Tower had a pending sales agreement for a price in
excess of its carrying value (see Assets Held For Sale) and is not considered to be impaired.
(The sale of the Ocean Tower was completed on October 26, 2009.) We evaluated our three cold-stacked rigs for impairment using the probability-weighted cash flow
analysis discussed above. Based on these analyses, we determined that the probability-weighted
cash flows exceeded the carrying value of each rig.
Managements assumptions are an inherent part of our asset impairment evaluation and the use
of different assumptions could produce results that differ from those reported.
Comprehensive Income
A reconciliation of net income to comprehensive income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income |
$ | 364,134 | $ | 310,533 | $ | 1,100,155 | $ | 1,017,204 | ||||||||
Other comprehensive gains (losses), net of tax: |
||||||||||||||||
Foreign currency forward exchange contracts: |
||||||||||||||||
Unrealized holding gain |
1,361 | | 5,192 | | ||||||||||||
Reclassification adjustment for gain
included in net income |
(1,459 | ) | | (1,459 | ) | | ||||||||||
Investments in marketable securities: |
||||||||||||||||
Unrealized holding gain (loss) |
(2 | ) | (4 | ) | 34 | 14 | ||||||||||
Reclassification adjustment for gain
included in net income |
4 | (12 | ) | (503 | ) | (12 | ) | |||||||||
Comprehensive income |
$ | 364,038 | $ | 310,517 | $ | 1,103,419 | $ | 1,017,206 | ||||||||
The tax related to the change in unrealized holding gain on forward exchange contracts
for the three and nine months ended September 30, 2009 was $0.7 million and $2.8 million,
respectively. The tax related to the reclassification adjustment for foreign currency forward
exchange contracts included in net income for both the three and nine months ended September 30,
2009 was $0.8 million.
The tax related to the change in unrealized holding losses on investments for the three months
ended September 30, 2009 was approximately $1,000 and the tax related to the change in unrealized
holding gains on investments for the nine months ended September 30, 2009 was approximately
$18,000. The tax effect on the reclassification adjustment for net gains on investments included
in net income for the three months ended September 30, 2009 was approximately $2,000 and the tax
effect on the reclassification adjustment for net losses on investments included in net income for
the nine months ended September 30, 2009 was approximately $271,000.
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The tax related to the change in unrealized holding loss on investments was approximately
$2,000 for the three months ended September 30, 2008 and the tax related to the change in
unrealized holding gain on investments was approximately $8,000 for the nine months ended September
30, 2008. The tax effect on the reclassification adjustment for net losses on investments included
in net income was approximately $6,000 for the three and nine months ended September 30, 2008.
Foreign Currency
Our functional currency is the U.S. dollar. Foreign currency transaction gains and losses,
including gains and losses on our foreign currency forward exchange contracts not designated as
accounting hedges, are reported as Foreign currency transaction gain (loss) in our Consolidated
Statements of Operations. For the three and nine months ended September 30, 2009, we recognized
net foreign currency exchange gains of $8.3 million and $17.9 million, respectively. For the three
and nine months ended September 30, 2008, we recognized net foreign currency exchange losses of
$29.0 million and $14.6 million, respectively. See Note 4.
Revenue Recognition
Revenue from our dayrate drilling contracts is recognized as services are performed. In
connection with such drilling contracts, we may receive fees (either lump-sum or dayrate) for the
mobilization of equipment. These fees are earned as services are performed over the initial term
of the related drilling contracts. We defer mobilization fees received, as well as direct and
incremental mobilization costs incurred, and amortize each, on a straight line basis, over the term
of the related drilling contracts (which is the period estimated to be benefited from the
mobilization activity). Straight line amortization of mobilization revenues and related costs over
the initial term of the related drilling contracts (which generally range from two to 60 months) is
consistent with the timing of net cash flows generated from the actual drilling services performed.
Absent a contract, mobilization costs are recognized as incurred.
From time to time, we may receive fees from our customers for capital improvements to our
rigs. We defer such fees received in Accrued liabilities and Other liabilities in our
Consolidated Balance Sheets and recognize these fees into income on a straight-line basis over the
period of the related drilling contract. We capitalize the costs of such capital improvements and
depreciate them over the estimated useful life of the asset.
We record reimbursements received for the purchase of supplies, equipment, personnel services
and other services provided at the request of our customers in accordance with a contract or
agreement, for the gross amount billed to the customer, as Revenues related to reimbursable
expenses in our Consolidated Statements of Operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results could differ from
those estimated.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605), Multiple Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues
Task Force, or ASU 2009-13. ASU 2009-13 addresses the accounting for multiple deliverable
arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. ASU 2009-13 changes the guidance provided in the ASC Subtopic 605-25,
Revenue Recognition -Multiple-Element Arrangements, or ASC-
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605-25, to allow the financial reporting of revenue arrangements to reflect the underlying
economics of transactions. The amendments to ASC-605-25 will be effective prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010. We are currently evaluating the impact that the adoption of the amendments to ASC-605-25
will have on our results of operations and financial position, as well as the related disclosure
requirements.
2. Earnings Per Share
A reconciliation of the numerators and the denominators of our basic and diluted per-share
computations follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net income basic (numerator): |
$ | 364,134 | $ | 310,533 | $ | 1,100,155 | $ | 1,017,204 | ||||||||
Effect of dilutive potential shares |
||||||||||||||||
1.5% Debentures |
| | | 15 | ||||||||||||
Zero Coupon Debentures |
24 | 9 | 70 | 17 | ||||||||||||
Net income including conversions
diluted (numerator) |
$ | 364,158 | $ | 310,542 | $ | 1,100,225 | $ | 1,017,236 | ||||||||
Weighted average shares basic (denominator): |
139,005 | 139,001 | 139,003 | 138,945 | ||||||||||||
Effect of dilutive potential shares |
||||||||||||||||
1.5% Debentures |
| | | 25 | ||||||||||||
Zero Coupon Debentures |
52 | 52 | 52 | 52 | ||||||||||||
Stock options and SARs |
46 | 38 | 28 | 54 | ||||||||||||
Weighted average shares including conversions
diluted (denominator) |
139,103 | 139,091 | 139,083 | 139,076 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 2.62 | $ | 2.23 | $ | 7.91 | $ | 7.32 | ||||||||
Diluted |
$ | 2.62 | $ | 2.23 | $ | 7.91 | $ | 7.31 | ||||||||
Our computation of diluted earnings per share, or EPS, for the three months ended
September 30, 2009 excludes stock options representing 2,000 shares of common stock and 360,823
stock appreciation rights, or SARs. Our computation of EPS for the nine months ended September 30,
2009 excludes stock options representing 11,086 shares of common stock and 430,575 SARs. The
inclusion of such potentially dilutive shares in the computation of diluted EPS would have been
antidilutive for the periods presented.
Our computation of diluted EPS for the three and nine months ended September 30, 2008 excludes
247,042 and 182,037 SARs, respectively. The inclusion of such potentially dilutive shares in the
computation of diluted EPS would have been antidilutive for the periods presented.
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3. Marketable Securities
We report our investments as current assets in our Consolidated Balance Sheets in Marketable
securities, representing the investment of cash available for current operations. See Note 5.
Our investments in marketable securities are classified as available for sale and are
summarized as follows:
September 30, 2009 | ||||||||||||
Amortized | Unrealized | Market | ||||||||||
Cost | Gain | Value | ||||||||||
(In thousands) | ||||||||||||
Mortgage-backed securities |
$ | 816 | $ | 64 | $ | 880 | ||||||
December 31, 2008 | ||||||||||||
Amortized | Unrealized | Market | ||||||||||
Cost | Gain | Value | ||||||||||
(In thousands) | ||||||||||||
Due within one year |
$ | 398,791 | $ | 758 | $ | 399,549 | ||||||
Mortgage-backed securities |
1,016 | 27 | 1,043 | |||||||||
Total |
$ | 399,807 | $ | 785 | $ | 400,592 | ||||||
Proceeds from sales and maturities of marketable securities and gross realized gains and
losses are summarized as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
Proceeds from sales |
$ | 100,039 | $ | 643,720 | $ | 2,548,868 | $ | 743,742 | ||||||||
Proceeds from maturities |
800,000 | | 1,550,000 | 550,000 | ||||||||||||
Gross realized gains |
22 | 680 | 790 | 680 | ||||||||||||
Gross realized losses |
(2 | ) | (3 | ) | (171 | ) | (6 | ) |
4. Derivative Financial Instruments
Foreign Currency Forward Exchange Contracts
Our international operations expose us to foreign exchange risk associated with our costs
payable in foreign currencies for employee compensation, foreign income tax payments and purchases
from foreign suppliers. We may utilize foreign currency forward exchange contracts to reduce our
forward exchange risk. Our foreign currency forward exchange contracts may obligate us to exchange
predetermined amounts of foreign currencies on specified dates or to net settle the spread between
the contracted foreign currency exchange rate and the spot rate on the contract settlement date,
which, for certain of our contracts, is the average spot rate for the contract period.
We enter into foreign currency forward exchange contracts when we believe market conditions
are favorable to purchase contracts for future settlement with the expectation that such contracts,
when settled, will reduce our exposure to foreign currency gains/losses on foreign currency
expenditures in the future. The amount and duration of such contracts is based on our monthly
forecast of expenditures in the significant currencies in which we do business and for which there
is a financial market (i.e., Australian dollars, Brazilian reais, British pounds sterling, Mexican
pesos and Norwegian kroner). These forward contracts are derivatives as defined by
ASC Topic 815, Derivatives and Hedging, or ASC 815 (previously
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivatives and
Hedging Activities).
ASC 815 requires that each derivative be stated in the balance sheet at its fair value with
gains and losses reflected in the income statement except that, to the extent the derivative
qualifies for hedge accounting, the gains and losses are reflected in income in the same period as
offsetting losses and gains on the qualifying hedged positions. For derivative contracts entered
into prior to May 2009, we did not seek hedge accounting treatment under ASC 815. Accordingly,
prior to May 2009, all adjustments to record the carrying value of our derivative
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financial instruments at fair value were reported as Foreign currency transaction gain (loss) in
our Consolidated Statements of Operations.
Realized gains or losses upon settlement of the derivative contracts not designated as cash
flow hedges are reported as Foreign currency transaction gain (loss) in our Consolidated
Statements of Operations.
Beginning in May 2009, we began a hedging strategy and designated certain of our qualifying
foreign currency forward exchange contracts as cash flow hedges pursuant to ASC 815. These hedges
are expected to be highly effective, and therefore, adjustments to record the carrying value of the
effective portion of our derivative financial instruments to their fair value is recorded as a
component of Accumulated other comprehensive income, or AOCI, in our Consolidated Financial
Statements. The effective portion of the cash flow hedge will remain in AOCI until it is
reclassified into earnings in the period or periods during which the hedged transaction affects
earnings or it is determined that the hedged transaction will not occur. Adjustments to record the
carrying value of the ineffective portion of our derivative financial instruments to fair value are
recorded as Foreign currency transaction gain (loss) in our Consolidated Statements of
Operations.
Realized gains or losses upon settlement of derivative contracts designated as cash flow
hedges are reported as a component of Contract drilling expense in our Consolidated Statements of
Operations to offset the impact of foreign currency fluctuations in our expenditures in local
foreign currencies in the countries in which we operate.
During the nine months ended September 30, 2009, we settled foreign currency exchange
contracts with an aggregate notional value of approximately $279.3 million, of which an aggregate
notional value of $61.1 million was designated as an accounting hedge.
As of September 30, 2009, we had foreign currency exchange contracts outstanding in the
aggregate notional amount of $87.5 million, consisting of $27.6 million in Australian dollars,
$18.0 million in Brazilian reais, $22.3 million in British pounds sterling, $7.6 million in Mexican
pesos and $12.0 million in Norwegian kroner. These contracts generally settle monthly through
March 2010. As of September 30, 2009, all outstanding derivative contracts had been designated as
cash flow hedges, except for derivative contracts with a notional amount aggregating $2.4 million
in Norwegian kroner. See Note 5.
The following table presents the fair values of our derivative financial instruments at
September 30, 2009:
Assets | Liabilities | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
(In | (In | |||||||||||||||
thousands) | thousands) | |||||||||||||||
Derivatives designated as hedging instruments under ASC 815: |
||||||||||||||||
Foreign currency forward exchange contracts |
Prepaid expenses and other current assets |
$ | 5,972 | Accrued liabilities | $ | (229 | ) | |||||||||
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||||||
Foreign currency forward exchange contracts |
Prepaid expenses and other current assets |
277 | | |||||||||||||
$ | 6,249 | $ | (229 | ) | ||||||||||||
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The following table presents the amounts recognized in our Consolidated Balance Sheets
and Consolidated Statements of Operations related to our foreign currency forward exchange
contracts designated as cash flow hedges under ASC 815 for each of the three and nine month periods
ended September 30, 2009.
Location of Gain | ||||||||||||||
Recognized in Income | Amount of (Loss) | |||||||||||||
Amount of Gain | on Derivative | Recognized in Income on | ||||||||||||
Recognized in | Location of Gain | Amount of Gain | (Ineffective Portion | Derivative (Ineffective | ||||||||||
AOCI on | Reclassified from | Reclassified from | and Amount Excluded | Portion and Amount | ||||||||||
Derivative | AOCI into Income | AOCI into Income | from Effectiveness | Excluded from | ||||||||||
(Effective Portion) | (Effective Portion) | (Effective Portion) | Testing) | Effectiveness Testing) | ||||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||||||
$ | 7,987 | Contract drilling expense |
$ | 2,244 | Foreign currency transaction gain |
$ | (269 | ) |
The following table presents the amounts recognized in our Consolidated Statements of
Operations related to our foreign currency forward exchange contracts not designated as hedging
instruments under ASC 815 for the three and nine month periods ended September 30, 2009 and 2008.
Amount of Gain Recognized in Income | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Location of Gain (Loss) Recognized in Income | 2009 | 2008 | 2009 | 2008 | ||||||||||||
(In thousands) | ||||||||||||||||
Foreign currency transaction gain |
$ | 238 | $ | (25,070 | ) | $ | 8,806 | $ | (7,920 | ) |
The amounts presented in the table above include unrealized gains of approximately $147,000
and $37.6 million for the three months and nine months ended September 30, 2009, respectively, to
record the carrying value of our derivative financial instruments to their fair value. The amounts
presented in the table above include unrealized losses of $28.7 million and $19.1 million for the
three months and nine months ended September 30, 2008, respectively, to record the carrying value
of our derivative financial instruments to their fair value.
As of September 30, 2009, the estimated amount of net unrealized gains associated with our
foreign currency forward exchange contracts that will be reclassified to earnings during the next
twelve months was $5.7 million. The net unrealized gains associated with these derivative
financial instruments will be reclassified to contract drilling expense.
5. Financial Instruments and Fair Value Disclosures
Concentrations of Credit and Market Risk
Financial instruments which potentially subject us to significant concentrations of credit or
market risk consist primarily of periodic temporary investments of excess cash, trade accounts
receivable and investments in debt securities, including mortgage-backed securities. We place our
excess cash investments in high quality short-term money market instruments through several
financial institutions. At times, such investments may be in excess of the insurable limit. We
periodically evaluate the relative credit standing of these financial institutions as part of our
investment strategy.
Concentrations of credit risk with respect to our trade accounts receivable are limited
primarily due to the entities comprising our customer base. Since the market for our services is
the offshore oil and gas industry, this customer base consists primarily of major and independent
oil and gas companies and government-owned oil companies. In general, before working for a
customer with whom we have not had a prior business relationship and/or whose financial stability
may appear uncertain to us, we perform a credit review on that company. Based on that analysis, we
may require that the customer present a letter of credit, prepay or provide other credit
enhancements.
During the second quarter of 2009, one of our customers sought short-term financial relief
with respect to an existing contractual agreement with us for a six-well, one-year minimum contract
term, program that began in May 2009. As a result, we agreed to amend our existing contract with
this customer, and in consideration of this amendment, we are to receive a $20,000 per day increase
in the total contractual operating dayrate, to a total of $560,000 per day, for a minimum of the
first 240 days of the initial one-year contract. Under the terms of the
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amended agreement, the
customer is obligated to pay us $75,000 per day in accordance with our normal credit terms (due 30
days after receipt of invoice). The remainder of the dayrate for the six well program (minimum of
240 days) will be paid through the conveyance of a 27% net profit interest, or NPI, in a minimum of
five developmental oil-and-gas producing properties covering six wells owned by the customer.
Based on the current production payout estimate, we anticipate that the first payment from the
conveyance of the NPI will commence in early 2010. Payments of such amounts, and the timing of
such payments, are contingent upon such production and upon energy sale prices. At September 30,
2009, the $55.5 million portion of this trade receivable that is expected to be paid from the NP,
is presented as Accounts Receivable in our Consolidated Balance Sheets.
In December 2008, we recorded a $31.9 million provision for bad debts to reserve the
uncollected balance of one of our customers in the United Kingdom, or U.K., that has entered into
administration (a U.K. insolvency proceeding similar to U.S. Chapter 11 bankruptcy). We also
provide allowances for potential credit losses when necessary.
No additional allowances were deemed necessary for the periods presented. Prior to December
2008, we have not experienced significant losses on our trade receivables.
Nearly all of our investments in debt securities are U.S. government securities with minimal
credit risk. However, we are exposed to market risk due to price volatility associated with
interest rate fluctuations.
Fair Values
The amounts reported in our Consolidated Balance Sheets for cash and cash equivalents,
marketable securities, accounts receivable, forward exchange contracts and accounts payable
approximate fair value. Fair values and related carrying values of our debt instruments are shown
below:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
(In millions) | ||||||||||||||||
Zero Coupon Debentures |
$ | 4.9 | $ | 4.1 | $ | 3.0 | $ | 4.0 | ||||||||
4.875% Senior Notes |
259.5 | 249.7 | 230.0 | 249.6 | ||||||||||||
5.15% Senior Notes |
267.2 | 249.7 | 237.0 | 249.6 | ||||||||||||
5.875% Senior Notes |
523.4 | 499.3 | | |
We have estimated the fair value amounts by using appropriate valuation methodologies and
information available to management as of September 30, 2009 and December 31, 2008, respectively.
Considerable judgment is required in developing these estimates, and accordingly, no assurance can
be given that the estimated values are indicative of the amounts that would be realized in a free
market exchange. The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it was practicable to estimate that value:
| Cash and cash equivalents The carrying amounts approximate fair value because of the short maturity of these instruments. |
| Marketable securities The fair values of the debt securities, including mortgage-backed securities, available for sale were based on the quoted closing market prices on September 30, 2009 and December 31, 2008, respectively. |
| Accounts receivable and accounts payable The carrying amounts approximate fair value based on the nature of the instruments. |
| Forward exchange contracts The fair value of our foreign currency forward exchange contracts is based on both quoted market prices and valuations derived from pricing models on September 30, 2009 and December 31, 2008, respectively. |
| Long-term debt The fair value of our Zero Coupon Debentures is based on the closing market price of our common stock on September 30, 2009 and December 31, 2008, respectively, and the stated conversion rate for the debentures. The fair values of our 4.875% Senior Notes due 2015 and 5.15% Senior Notes due 2014 are based on the quoted closing market prices on September 30, 2009 and December 31, 2008, respectively, from brokers of these instruments. The fair value of our 5.875% Senior Notes due 2019 is based on the quoted market price on September 30, 2009 from brokers of this instrument. |
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Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, or SFAS 157,
which requires additional disclosures about our assets and liabilities that are measured at fair
value. SFAS 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
Level 1
|
Quoted prices for identical instruments in active markets. Level 1 assets include short-term investments such as money market funds and U.S. Treasury Bills. Our Level 1 assets at September 30, 2009 consisted of $234.4 million in cash held in money market funds. | |
Level 2
|
Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities include mortgage-backed securities and over-the-counter foreign currency forward exchange contracts that are valued using a model-derived valuation technique. | |
Level 3
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of transparency as to the inputs used. |
Assets and liabilities measured at fair value on a recurring basis are summarized below:
September 30, 2009 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Short-term investments |
$ | 234,378 | $ | | $ | | $ | 234,378 | ||||||||
Residential
mortgage-backed
securities |
| 880 | | 880 | ||||||||||||
Forward exchange contracts |
| 6,249 | | 6,249 | ||||||||||||
Total assets |
$ | 234,378 | $ | 7,129 | $ | | $ | 241,507 | ||||||||
Liabilities: |
||||||||||||||||
Forward exchange contracts |
$ | | $ | (229 | ) | $ | | $ | (229 | ) | ||||||
December 31, 2008 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||
(In thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Short-term investments |
$ | 700,038 | $ | | $ | | $ | 700,038 | ||||||||
Residential
mortgage-backed
securities |
| 1,043 | | 1,043 | ||||||||||||
Total assets |
$ | 700,038 | $ | 1,043 | $ | | $ | 701,081 | ||||||||
Liabilities: |
||||||||||||||||
Forward exchange contracts |
$ | | $ | (37,301 | ) | $ | | $ | (37,301 | ) | ||||||
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6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Rig spare parts and supplies |
$ | 50,285 | $ | 52,481 | ||||
Deferred mobilization costs |
31,632 | 28,924 | ||||||
Prepaid insurance |
17,938 | 11,845 | ||||||
Deferred tax assets |
9,350 | 9,350 | ||||||
Foreign currency forward exchange contracts |
6,249 | | ||||||
Deposits |
4,369 | 3,846 | ||||||
Prepaid taxes |
36,281 | 11,589 | ||||||
Other |
14,142 | 5,011 | ||||||
Total |
$ | 170,246 | $ | 123,046 | ||||
7. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized
as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Drilling rigs and equipment |
$ | 6,350,960 | $ | 5,600,306 | ||||
Construction work-in-progress |
490,024 | | ||||||
Land and buildings |
36,532 | 35,069 | ||||||
Office equipment and other |
36,616 | 34,021 | ||||||
Cost |
6,914,132 | 5,669,396 | ||||||
Less: accumulated depreciation |
(2,512,002 | ) | (2,255,023 | ) | ||||
Drilling and other property and equipment, net |
$ | 4,402,130 | $ | 3,414,373 | ||||
In June 2009, we acquired the Ocean Courage, a newbuild, dynamically positioned,
semisubmersible drilling rig, for $460.0 million, exclusive of final commissioning and initial
mobilization costs, drill string and other necessary capital spares.
On September 29, 2009, we acquired from PetroRig II Pte Ltd the construction contract to
purchase from Jurong Shipyard Pte Ltd, or Jurong Shipyard, a newbuild, 7,500 foot, dynamically
positioned, semisubmersible drilling rig. We funded the final payment to Jurong Shipyard on
September 30, 2009, and the purchase of the rig was completed on October 1, 2009 in Singapore. The
aggregate amount of the consideration paid to acquire the construction contract and the final
payment to Jurong Shipyard under the construction contract was approximately $490.0 million and
has been presented in the table above as construction work-in-progress. The rig has been renamed
the Ocean Valor.
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8. Accrued Liabilities
Accrued liabilities consist of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Accrued maintenance/capital projects |
$ | 87,837 | $ | 106,135 | ||||
Payroll and benefits |
70,466 | 69,326 | ||||||
Deferred revenue |
70,020 | 39,307 | ||||||
Rig operating expenses |
24,664 | 30,056 | ||||||
Interest payable |
16,115 | 10,385 | ||||||
Personal injury and other claims |
9,988 | 10,489 | ||||||
Foreign currency forward exchange contracts |
229 | 37,301 | ||||||
Hurricane related expenses |
| 5,080 | ||||||
Other |
18,919 | 21,447 | ||||||
Total |
$ | 298,238 | $ | 329,526 | ||||
9. Long-Term Debt
Long-term debt consists of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Zero Coupon Debentures (due 2020) |
$ | 4,143 | $ | 4,036 | ||||
5.15% Senior Notes (due 2014) |
249,667 | 249,623 | ||||||
4.875% Senior Notes (due 2015) |
249,658 | 249,621 | ||||||
5.875% Senior Notes (due 2019) |
499,278 | | ||||||
1,002,746 | 503,280 | |||||||
Less: Current maturities |
4,143 | | ||||||
Total |
$ | 998,603 | $ | 503,280 | ||||
At September 30, 2009, there was $6.0 million aggregate principal amount at maturity, or
$4.1 million accreted, or carrying, value, of our Zero Coupon Debentures outstanding.
On October 8, 2009, we issued $500.0 million aggregate principal amount of senior unsecured
notes. See Note 13.
5.875% Senior Notes
On May 4, 2009, we issued $500.0 million aggregate principal amount of our 5.875% Senior Notes
due May 1, 2019, or 5.875% Senior Notes, for general corporate purposes. The 5.875% Senior Notes
were issued at an offering price of 99.851% of the principal and resulted in net proceeds to us of
approximately $495.3 million.
The notes bear interest at 5.875% per year, payable semiannually in arrears on May 1 and
November 1 of each year, beginning November 1, 2009, and mature on May 1, 2019. The 5.875% Senior
Notes are unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc., or DODI, and
rank equal in right of payment to existing and future unsecured and unsubordinated indebtedness of
DODI. We have the right to redeem all or a portion of these notes for cash at any time or from
time to time, on at least 15 days but not more than 60 days prior written notice, at the redemption
price specified in the governing indenture plus accrued and unpaid interest to the date of
redemption.
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As reflected in the table below, the holders of our outstanding Zero Coupon Debentures have
the right to require us to purchase all or a portion of their outstanding debentures on June 6,
2010. The aggregate maturities of long-term debt for each of the five years subsequent to
September 30, 2009 are as follows:
(In thousands) | ||||
2010 |
$ | 4,143 | ||
2011 |
| |||
2012 |
| |||
2013 |
| |||
2014 |
249,667 | |||
Thereafter |
748,936 | |||
1,002,746 | ||||
Less: Current maturities |
(4,143 | ) | ||
Total |
$ | 998,603 | ||
10. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims
by offshore workers alleging personal injuries. In accordance with SFAS No. 5, Accounting for
Contingencies, or SFAS 5, we have assessed each claim or exposure to determine the likelihood that
the resolution of the matter might ultimately result in an adverse effect on our financial
condition, results of operations and cash flows. When we determine that an unfavorable resolution
of a matter is probable and such amount of loss can be determined, we record a reserve for the
estimated loss at the time that both of these criteria are met. Our management believes that we
have established adequate reserves for any liabilities that may reasonably be expected to result
from these claims.
Litigation. During the second quarter of 2009, the U.S. District Court ruled in our favor and
dismissed a lawsuit filed in January 2005 by Total E&P USA, Inc. and several oil companies against
us alleging that our semisubmersible rig, the Ocean America, damaged a natural gas pipeline in the
Gulf of Mexico during Hurricane Ivan. The plaintiffs have appealed the judgment.
We are one of several unrelated defendants in lawsuits filed in the Circuit Courts of the
State of Mississippi alleging that defendants manufactured, distributed or utilized drilling mud
containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our
offshore drilling rigs. The plaintiffs seek, among other things, an award of unspecified
compensatory and punitive damages. We expect to receive complete defense and indemnity from Murphy
Exploration & Production Company pursuant to the terms of our 1992 asset purchase agreement with
them. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but
do not believe that ultimate liability, if any, resulting from this litigation will have a material
adverse effect on our financial condition, results of operations and cash flows.
Various other claims have been filed against us in the ordinary course of business. In the
opinion of our management, no pending or known threatened claims, actions or proceedings against us
are expected to have a material adverse effect on our consolidated financial position, results of
operations and cash flows.
Personal Injury Claims. Our deductible for liability insurance coverage for personal injury
claims, which primarily result from Jones Act liability in the Gulf of Mexico, is $5.0 million per
occurrence, with no aggregate deductible. The Jones Act is a federal law that permits seamen to
seek compensation for certain injuries during the course of their employment on a vessel and
governs the liability of vessel operators and marine employers for the work-related injury or death
of an employee. We engage experts to assist us in estimating our aggregate reserve for personal
injury claims based on our historical losses and utilizing various actuarial models. At September
30, 2009, our estimated liability for personal injury claims was $32.7 million, of which $9.4
million and $23.3 million were recorded in Accrued liabilities and Other liabilities,
respectively, in our Consolidated Balance Sheets. At December 31, 2008, our estimated liability
for personal injury claims was $30.1 million, of which $9.5 million and $20.6 million were recorded
in Accrued liabilities and Other liabilities, respectively, in our Consolidated Balance Sheets.
The eventual settlement or adjudication of these claims could differ materially from our estimated
amounts due to uncertainties such as:
| the severity of personal injuries claimed; |
| significant changes in the volume of personal injury claims; |
| the unpredictability of legal jurisdictions where the claims will ultimately be litigated; |
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| inconsistent court decisions; and |
| the risks and lack of predictability inherent in personal injury litigation. |
11. Segments and Geographic Area Analysis
Although we provide contract drilling services with different types of offshore drilling rigs
and also provide such services in many geographic locations, we have aggregated these operations
into one reportable segment based on the similarity of economic characteristics among all divisions
and locations, including the nature of services provided and the type of customers of such
services, in accordance with FASB ASC Topic 280, Segment Reporting (previously SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information).
Revenues from contract drilling services by equipment-type are listed below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
High Specification Floaters |
$ | 353,318 | $ | 344,024 | $ | 999,979 | $ | 979,313 | ||||||||
Intermediate Semisubmersibles |
421,145 | 401,891 | 1,303,907 | 1,239,711 | ||||||||||||
Jack-ups |
110,818 | 136,038 | 360,561 | 369,895 | ||||||||||||
Total contract drilling revenues |
885,281 | 881,953 | 2,664,447 | 2,588,919 | ||||||||||||
Revenues related to reimbursable
expenses |
23,094 | 18,423 | 76,055 | 51,931 | ||||||||||||
Total revenues |
$ | 908,375 | $ | 900,376 | $ | 2,740,502 | $ | 2,640,850 | ||||||||
Geographic Areas
At September 30, 2009, our drilling rigs were located offshore thirteen countries in addition
to the United States. As a result, we are exposed to the risk of changes in social, political and
economic conditions inherent in international operations and our results of operations and the
value of our international assets are affected by fluctuations in foreign currency exchange rates.
Revenues by geographic area are presented by attributing revenues to the individual country or
areas where the services were performed.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
United States |
$ | 285,665 | $ | 369,410 | $ | 975,844 | $ | 1,088,971 | ||||||||
International: |
||||||||||||||||
Australia/Asia/Middle East |
169,910 | 166,741 | 543,368 | 476,349 | ||||||||||||
Europe/Africa/Mediterranean |
179,588 | 131,999 | 490,390 | 386,767 | ||||||||||||
South America |
191,044 | 150,711 | 488,454 | 436,315 | ||||||||||||
Mexico |
82,168 | 81,515 | 242,446 | 252,448 | ||||||||||||
Total revenues |
$ | 908,375 | $ | 900,376 | $ | 2,740,502 | $ | 2,640,850 | ||||||||
12. Income Taxes
Our income tax expense is a function of the mix between our domestic and international pre-tax
earnings or losses, as well as the mix of international tax jurisdictions in which we operate.
Certain of our international rigs are owned and operated, directly or indirectly, by Diamond
Offshore International Limited, or DOIL, a Cayman Islands subsidiary which we wholly own. It is
our intention to indefinitely reinvest future earnings of DOIL to finance foreign activities except
to the extent that such earnings were immediately subject to U.S. federal income taxes and except
for the earnings of Diamond East Asia Limited, or DEAL, a wholly-owned subsidiary of DOIL formed in
December 2008. Accordingly, U.S. income taxes have been provided on the earnings of DEAL.
During the three months ended September 30, 2009 we reached an agreement with the Internal
Revenue Service to settle the audits of the tax years 2004 through 2006 for total additional income
tax expense of $55,000. Return to
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provision adjustments made during the three months ended September 30, 2009 that were
associated with the filing of our 2008 tax returns in various jurisdictions resulted in additional
tax expense of $11.0 million.
On March 31, 2009, the statute of limitations relative to a 2003 uncertain tax position in
Mexico expired. As a consequence we reversed $5.5 million of previously accrued interest expense
and $5.9 million of previously accrued tax expense, $0.8 million of which had been accrued for
penalties.
13. Subsequent Event
On October 8, 2009, we issued $500.0 million aggregate principal amount of our 5.70% Senior
Notes due 2039 for general corporate purposes. The notes were issued at an offering price of
99.344% of the principal and resulted in net proceeds to us of approximately $491.9 million,
exclusive of accrued issuance costs. The notes are unsecured and bear interest at 5.70% per year,
payable semiannually in arrears on April 15 and October 15, and mature on October 15, 2039.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited consolidated
financial statements (including the notes thereto) included elsewhere in this report and our
audited consolidated financial statements and the notes thereto, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors included
in our Annual Report on Form 10-K for the year ended December 31, 2008 and Item 1A of Part II,
Risk Factors, included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
References to Diamond Offshore, we, us or our mean Diamond Offshore Drilling, Inc., a
Delaware corporation, and its subsidiaries.
We provide contract drilling services to the energy industry around the globe and are a leader
in offshore drilling. With the addition of the 10,000 foot, dynamically positioned,
semisubmersible Ocean Courage in June 2009 and the addition of the 7,500 foot, dynamically
positioned, semisubmersible Ocean Valor in October 2009, we now have a fleet of 47 offshore rigs
currently consisting of 32 semisubmersibles, 14 jack-ups and one drillship.
Overview
Industry Conditions
The global economic recession continued to weigh on energy demand in the third quarter of
2009. Crude oil prices averaged around $70 per barrel during the period, but remained volatile.
Against this background, demand and pricing for all but the highest-specification equipment has
remained weak compared with the same period in 2008, with some customers actively seeking to
farm-out time to other operators on rigs they have under contract. In effect, offering to farm out
rigs creates additional supply against which we must compete. The decline in drilling activity is
expected to be further exacerbated by the influx of new-build rigs over the next several years,
particularly in regard to jack-up units. We expect our extensive contract backlog to help mitigate
the impact of the current market conditions on us at least through the end of 2009 and into 2010;
however, we have experienced negative effects of the current market such as customer credit
problems, customers attempting to renegotiate or terminate contracts, one customer seeking
bankruptcy protection, a further slowing in the pace of new contracting activity, declines in
dayrates for new contracts, declines in utilization and the stacking of idle equipment.
Floaters
Approximately 88% of the time on our intermediate and high-specification floater rigs is
committed for the remainder of 2009. Additionally, commitments for 75% of the time on our floating
rigs extend at least through 2010, with 10% of our floating units having contracts extending into
the 2014-2015 timeframe.
During the third quarter, we reached an agreement with a customer to employ the recently
purchased dynamically positioned, high-specification rig, Ocean Courage, under a five-year contract
at a dayrate of $395,000, plus a potential 8% bonus. The rig, which is currently mobilizing from
Singapore, is initially scheduled to work in the U.S. Gulf of Mexico, or GOM, with commencement of
activity expected in early 2010. In addition, we reached an agreement with one of our customers in
the GOM on a second one-year extension for the mid-water unit Ocean Saratoga, to occupy the rig
until mid 2011. In exchange for the extension, we agreed to a varying dayrate structure which
provides for lower dayrates during the four-month period when the rig is limited as to where it may
operate during hurricane season due to regulatory restrictions, and higher dayrates at other times.
Additionally, at the close of the third quarter we announced our purchase of another newbuild
rig, which we have named the Ocean Valor. The dynamically positioned, high-specification unit is
undergoing final commissioning, and we believe there are multiple opportunities to employ the rig
on future deepwater projects.
International Jack-ups
The industrys jack-up market is divided between an international sector and a U.S. sector,
with the international sector historically characterized by contracts of longer duration and higher
prices, compared to the generally shorter term and lower priced domestic sector. However, to date
in 2009 demand and dayrates have softened internationally. Based on analyst reports to the effect
that less than 20% of the industrys new-build jack-up order book is under contract, it is expected
that an oversupply of jack-up rigs will have an increasingly negative impact on the international
jack-up sector during 2009 and beyond.
GOM Jack-ups
In the domestic jack-up sector, lower natural gas prices have negatively impacted both demand
and dayrates. In response, where possible we are continuing to seek to move units out of the GOM
and into markets with generally
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longer contract duration and higher prices. Two of our five jack-up rigs in the GOM are under
contract. To reduce costs, the remaining three mat rigs have been stacked and are not being
actively marketed. Absent a sustained improvement in natural gas prices, weakness in the GOM is
likely to continue in 2009, with the possibility of additional rigs being cold-stacked by the
industry in an effort to help bring equipment supply and demand into equilibrium. The number of
working jack-ups in the GOM remains near its lowest level since the early 1970s.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of October 22, 2009, February 5,
2009 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2008),
and
October 23, 2008 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008). The 2008 period includes both firm commitments (typically represented by
signed contracts), as well as previously-disclosed letters of intent, or LOIs, where indicated. An
LOI is subject to customary conditions, including the execution of a definitive agreement, and as
such may not result in a binding contract. Contract drilling backlog is calculated by multiplying
the contracted operating dayrate by the firm contract period and adding one-half of any potential
rig performance bonuses. Our calculation also assumes full utilization of our drilling equipment
for the contract period (excluding scheduled shipyard and survey days); however, the amount of
actual revenue earned and the actual periods during which revenues are earned will be different
than the amounts and periods shown in the tables below due to various factors. Utilization rates,
which generally approach 95-98% during contracted periods, can be adversely impacted by downtime
due to various operating factors including, but not limited to, weather conditions and unscheduled
repairs and maintenance. Contract drilling backlog excludes revenues for mobilization,
demobilization, contract preparation and customer reimbursables. No revenue is generally earned
during periods of downtime for regulatory surveys. Changes in our contract drilling backlog
between periods are a function of the performance of work on term contracts, as well as the
extension or modification of existing term contracts and the execution of additional contracts.
October 22, | February 5, | October 23, | ||||||||||
2009(1) | 2009 | 2008(2) | ||||||||||
(In thousands) | ||||||||||||
Contract Drilling Backlog |
||||||||||||
High-Specification Floaters |
$ | 4,450,000 | $ | 4,346,000 | $ | 4,720,000 | ||||||
Intermediate Semisubmersibles |
4,061,000 | 5,567,000 | 6,302,000 | |||||||||
Jack-ups |
249,000 | 346,000 | 428,000 | |||||||||
Total |
$ | 8,760,000 | $ | 10,259,000 | $ | 11,450,000 | ||||||
(1) | Contract drilling backlog as of October 22, 2009 included an aggregate $124.1 million in contract drilling revenue related to future work for one of our high-specification floaters for which a definitive agreement has not yet been executed. | |
(2) | Contract drilling backlog as of October 23, 2008 included an aggregate $189.8 million in contract drilling revenue related to anticipated future work under an LOI expected to be earned by one of our high-specification floaters during 2009 and 2010. |
The following table reflects the amount of our contract drilling backlog by year as of October
22, 2009.
For the Years Ending December 31, | ||||||||||||||||||||
Total | 2009(1) | 2010 | 2011 | 2012 - 2016 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Contract Drilling Backlog |
||||||||||||||||||||
High-Specification Floaters(2) |
$ | 4,450,000 | $ | 380,000 | $ | 1,522,000 | $ | 1,182,000 | $ | 1,366,000 | ||||||||||
Intermediate Semisubmersibles |
4,061,000 | 396,000 | 1,325,000 | 893,000 | 1,447,000 | |||||||||||||||
Jack-ups |
249,000 | 85,000 | 136,000 | 28,000 | | |||||||||||||||
Total |
$ | 8,760,000 | $ | 861,000 | $ | 2,983,000 | $ | 2,103,000 | $ | 2,813,000 | ||||||||||
(1) | Represents a three-month period beginning October 1, 2009. | |
(2) | Contract drilling backlog included an $118.7 million and $5.4 million in contract drilling revenue related to future work in 2010 and 2011, respectively, for which a definitive agreement has not yet been executed. |
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The following table reflects the percentage of rig days committed by year as of October 22,
2009. The percentage of rig days committed is calculated as the ratio of total days committed
under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our
fleet to total available days (number of rigs multiplied by the number of days in a particular
year). Total available days have been calculated based on the expected final commissioning date
for the Ocean Valor.
For the Years Ending December 31, | ||||||||||||||||
2009(1) | 2010 | 2011 | 2012 - 2016 | |||||||||||||
Rig Days Committed (2) |
||||||||||||||||
High-Specification Floaters |
91 | % | 82 | % | 54 | % | 13 | % | ||||||||
Intermediate Semisubmersibles |
87 | % | 70 | % | 48 | % | 15 | % | ||||||||
Jack-ups |
60 | % | 24 | % | 4 | % | |
(1) | Represents a three-month period beginning October 1, 2009. | |
(2) | Includes approximately 274 and 517 scheduled shipyard, survey and mobilization days for 2009 and 2010, respectively. |
General
The two most significant variables affecting revenues are dayrates for rigs and rig
utilization rates, each of which is a function of rig supply and demand in the marketplace. Demand
for drilling services is dependent upon the level of expenditures set by oil and gas companies for
offshore exploration and development, as well as a variety of political and economic factors. The
availability of rigs in a particular geographical region also affects both dayrates and utilization
rates. These factors are not within our control and are difficult to predict.
Demand affects the number of days our fleet is utilized and the dayrates earned. As
utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of
available rigs. Conversely, as utilization rates decrease, dayrates tend to decrease as well,
reflecting the excess supply of rigs. When a rig is idle, no dayrate is earned and revenues will
decrease as a result. Revenues can also be affected as a result of the acquisition or disposal of
rigs, required surveys and shipyard upgrades. In order to improve utilization or realize higher
dayrates, we may mobilize our rigs from one market to another. However, during periods of
mobilization, revenues may be adversely affected. As a response to changes in demand, we may
withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may
decrease or increase revenues, respectively.
Operating Income. Our operating income is primarily affected by revenue factors, but is also
a function of varying levels of operating expenses. Our operating expenses represent all direct
and indirect costs associated with the operation and maintenance of our drilling equipment. The
principal components of our operating costs are, among other things, direct and indirect costs of
labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter
rentals and insurance. Labor and repair and maintenance costs represent the most significant
components of our operating expenses. In general, our labor costs increase primarily due to higher
salary levels, rig staffing requirements and costs associated with labor regulations in the
geographic regions in which our rigs operate.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the
drilling unit is performing, as well as the age and condition of the equipment and the regions in
which our rigs are working.
Operating expenses generally are not affected by changes in dayrates, and short-term
reductions in utilization do not necessarily result in lower operating expenses. For instance, if
a rig is to be idle for a short period of time, few decreases in operating expenses may actually
occur since the rig is typically maintained in a prepared or ready-stacked state with a full
crew. In addition, when a rig is idle, we are responsible for certain operating expenses such as
rig fuel and supply boat costs, which are typically costs of the operator when a rig is under
contract. However, if the rig is to be idle for an extended period of time, we may reduce the size
of a rigs crew and take steps to cold stack the rig, which lowers expenses and partially offsets
the impact on operating income. We recognize, as incurred, operating expenses related to
activities such as inspections, painting projects and routine overhauls that meet certain criteria
and which maintain rather than upgrade our rigs. These expenses vary from period to period. Costs
of rig enhancements are capitalized and depreciated over the expected useful lives of the
enhancements. Higher depreciation expense decreases operating income in periods subsequent to
capital upgrades.
Our operating income is negatively impacted when we perform certain regulatory inspections,
which we refer to as a 5-year survey, or special survey, that are due every five years for each of
our rigs. Operating revenue decreases because these surveys are performed during scheduled
downtime in a shipyard. Operating expenses increase as a result of these surveys due to the cost
to mobilize the rigs to a shipyard, inspection costs incurred and repair and
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maintenance costs. Repair and maintenance costs may be required resulting from the survey or
may have been previously planned to take place during this mandatory downtime. The number of rigs
undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.
In addition, operating income may be negatively impacted by intermediate surveys, which are
performed at interim periods between 5-year surveys. Intermediate surveys are generally less
extensive in duration and scope than a 5-year survey. Although an intermediate survey may require
some downtime for the drilling rig, it normally does not require dry-docking or shipyard time,
except for rigs located in the U.K. and Norwegian sectors of the North Sea.
During the remainder of 2009, we currently expect to spend approximately 235 rig days for
5-year and intermediate surveys, the mobilization of rigs, contractually required modifications for
international contracts and extended maintenance projects. We can provide no assurance as to the
exact timing and/or duration of downtime associated with regulatory inspections, planned rig
mobilizations and other shipyard projects. See Contract Drilling Backlog.
We have elected to self-insure for physical damage to rigs and equipment caused by named
windstorms in the U.S. Gulf of Mexico. If named windstorms in the U.S. Gulf of Mexico cause
significant damage to our rigs, it could have a material adverse effect on our financial position,
results of operations and cash flows. However, under our insurance policy that expires on May 1,
2010, we continue to carry physical damage insurance for certain losses other than those caused by
named windstorms in the U.S. Gulf of Mexico, for which our deductible for physical damage is $25.0
million per occurrence.
Critical Accounting Estimates
Our significant accounting policies are discussed in Note 1 of our notes to consolidated
financial statements included in Item 1 of Part I of this report and in Note 1 of our notes to
audited consolidated financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2008. There were no material changes to these policies during the nine months
ended September 30, 2009.
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Results of Operations
Although we perform contract drilling services with different types of drilling rigs and in
many geographic locations, there is a similarity of economic characteristics among all our
divisions and locations, including the nature of services provided and the type of customers for
our services. We believe that the combination of our drilling rigs into one reportable segment is
the appropriate aggregation in accordance with FASB Accounting Standards Codification, or ASC,
Topic 280, Segment Reporting (previously Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information). However, for purposes of
this discussion and analysis of our results of operations, we provide greater detail with respect
to the types of rigs in our fleet and the geographic regions in which they operate to enhance the
readers understanding of our financial condition, changes in financial condition and results of
operations.
Three Months Ended September 30, 2009 and 2008
Comparative data relating to our revenue and operating expenses by equipment type are listed
below.
Three Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
High-Specification Floaters |
$ | 353,318 | $ | 344,024 | $ | 9,294 | ||||||
Intermediate Semisubmersibles |
421,145 | 401,891 | 19,254 | |||||||||
Jack-ups |
110,818 | 136,038 | (25,220 | ) | ||||||||
Total Contract Drilling Revenue |
$ | 885,281 | $ | 881,953 | $ | 3,328 | ||||||
Revenues Related to Reimbursable Expenses |
$ | 23,094 | $ | 18,423 | $ | 4,671 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
High-Specification Floaters |
$ | 103,258 | $ | 94,713 | $ | (8,545 | ) | |||||
Intermediate Semisubmersibles |
142,156 | 162,011 | 19,855 | |||||||||
Jack-ups |
52,559 | 58,159 | 5,600 | |||||||||
Other |
6,173 | (610 | ) | (6,783 | ) | |||||||
Total Contract Drilling Expense |
$ | 304,146 | $ | 314,273 | $ | 10,127 | ||||||
Reimbursable Expenses |
$ | 22,873 | $ | 18,126 | $ | (4,747 | ) | |||||
OPERATING INCOME |
||||||||||||
High-Specification Floaters |
$ | 250,060 | $ | 249,311 | $ | 749 | ||||||
Intermediate Semisubmersibles |
278,989 | 239,880 | 39,109 | |||||||||
Jack-ups |
58,259 | 77,879 | (19,620 | ) | ||||||||
Other |
(6,173 | ) | 610 | (6,783 | ) | |||||||
Reimbursable expenses, net |
221 | 297 | (76 | ) | ||||||||
Depreciation |
(86,485 | ) | (72,155 | ) | (14,330 | ) | ||||||
General and administrative expense |
(15,628 | ) | (13,944 | ) | (1,684 | ) | ||||||
Casualty loss |
| (6,281 | ) | 6,281 | ||||||||
Gain on disposition of assets |
217 | 228 | (11 | ) | ||||||||
Total Operating Income |
$ | 479,460 | $ | 475,825 | $ | 3,635 | ||||||
Other income (expense): |
||||||||||||
Interest income |
1,879 | 3,055 | (1,176 | ) | ||||||||
Interest expense |
(14,031 | ) | (2,989 | ) | (11,042 | ) | ||||||
Foreign currency transaction gain (loss) |
8,313 | (29,047 | ) | 37,360 | ||||||||
Other, net |
(336 | ) | 581 | (917 | ) | |||||||
Income before income tax expense |
475,285 | 447,425 | 27,860 | |||||||||
Income tax expense |
(111,151 | ) | (136,892 | ) | 25,741 | |||||||
NET INCOME |
$ | 364,134 | $ | 310,533 | $ | 53,601 | ||||||
During the third quarter of 2009, the global economic recession continued to impact our
industry, resulting in reduced demand for energy and volatile crude oil prices. Aggregate revenues
for the third quarter of 2009 increased $3.3 million, or less than 1%, compared to the third
quarter of 2008. Floater revenues increased $28.5 million due to the inclusion of a full quarter
of operating revenues for our recently upgraded Ocean Monarch. However, this
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increase in revenues was partially offset by a $25.2 million decrease in revenues generated by our
jack-up fleet compared to the third quarter of 2008. The decreased contribution by our jack-up
fleet was primarily due to the cold-stacking of three of our mat-supported jack-up rigs in the GOM
and the absence of revenues from the Ocean Tower, which was taken out of service in September 2008
as a result of damages sustained in Hurricane Ike in September 2008.
Total contract drilling expense decreased $10.1 million, or 3%, during the third quarter of
2009 compared to the same period in 2008. The net decrease in operating cost for the three months
ended September 30, 2009 reflects overall lower survey and related costs compared to the prior year
period, partially offset by the inclusion of normal operating costs for the recently upgraded Ocean
Monarch and our new jack-ups Ocean Shield and Ocean Scepter, and contract preparation.
Depreciation expense increased $14.3 million to $86.5 million during the third quarter of
2009, or 20% compared to the third quarter of 2008, due to a higher depreciable asset base.
High-Specification Floaters.
Three Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
HIGH-SPECIFICATION FLOATERS: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 237,635 | $ | 269,599 | $ | (31,964 | ) | |||||
Australia/Asia/Middle East |
40,936 | 13,712 | 27,224 | |||||||||
Europe/Africa/Mediterranean |
10,499 | | 10,499 | |||||||||
South America |
64,248 | 60,713 | 3,535 | |||||||||
Total Contract Drilling Revenue |
$ | 353,318 | $ | 344,024 | $ | 9,294 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 60,116 | $ | 59,557 | $ | (559 | ) | |||||
Australia/Asia/Middle East |
8,203 | 10,702 | 2,499 | |||||||||
Europe/Africa/Mediterranean |
3,008 | | (3,008 | ) | ||||||||
South America |
31,931 | 24,454 | (7,477 | ) | ||||||||
Total Contract Drilling Expense |
$ | 103,258 | $ | 94,713 | $ | (8,545 | ) | |||||
OPERATING INCOME |
$ | 250,060 | $ | 249,311 | $ | 749 | ||||||
GOM. Revenues generated by our high-specification floaters operating in the GOM
decreased $32.0 million during the third quarter of 2009 compared to the same period in 2008.
Comparing the quarters ended September 30, 2009 and 2008, we had a net decrease of one
high-specification semisubmersible rig in the GOM with the relocation of the Ocean Quest to Brazil
(late first quarter 2009) and Ocean Valiant to Angola (early third quarter 2009) and the
commencement of drilling service of the Ocean Monarch in the GOM (late first quarter 2009). The
effect of these rig relocations was a net $3.7 million reduction in revenues in the third quarter
of 2009 compared to the same period in 2008.
Excluding the effect of the rig relocations discussed above, average utilization for our
high-specification rigs operating in the GOM decreased from 98% in the third quarter of 2008 to
80%, primarily due to the Ocean Star being ready-stacked for the entire third quarter of 2009. The
decrease in average utilization resulted in a $42.6 million reduction in revenues in the third
quarter of 2009 compared to the same period of 2008. Excluding the Ocean Monarch, Ocean Quest and
Ocean Valiant, average operating revenue per day for our high-specification floaters in this market
increased to $444,500 during the third quarter of 2009 compared to $436,500 in the third quarter of
2008, resulting in additional revenues of $14.3 million.
Total operating costs during the third quarter of 2009 for our high-specification floaters in
the GOM remained constant compared to the prior year quarter. Increased costs associated with
normal operations of the Ocean Monarch in the GOM and the ready-stacking of the Ocean Star during
the third quarter of 2009 were mostly offset by decreased operating costs for the Ocean Quest and
Ocean Valiant as a result of their departures from the GOM.
Australia/Asia/Middle East. During the third quarter of 2009, the Ocean Rover, our
high-specification rig operating offshore Malaysia, generated $27.2 million in additional revenues
compared to the third quarter of 2008.
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The increase in revenues is primarily due to the nearly full utilization of the rig during the
third quarter of 2009, compared to 52 days of downtime for a special survey during the 2008 quarter
($17.6 million), and an increase in the average operating dayrate from $345,000 earned during the
third quarter of 2008 to $451,200 during the third quarter of 2009 ($9.6 million).
Operating costs during the third quarter of 2009 decreased $2.5 million over the third quarter
of the prior year, due primarily to the absence of costs associated with the rigs special survey
in 2008.
Europe/Africa/Mediterranean. The Ocean Valiant mobilized from the GOM to the
Europe/Africa/Mediterranean region during the third quarter of 2009. The rig began operating
offshore Angola in mid-September 2009 and generated revenues of $10.5 million and incurred normal
operating costs of $3.0 million.
South America. Revenues earned by our high-specification floaters operating offshore Brazil
in the third quarter of 2009 increased $3.5 million compared to the third quarter of 2008. The
Ocean Quest (which relocated from the GOM late in the first quarter of 2009) generated revenues of
$33.4 million during the third quarter of 2009. Partially offsetting the revenue contribution by
the Ocean Quest was a $29.5 million decrease in revenues generated by the Ocean Alliance due to a
decrease in average operating dayrate for the Ocean Alliance from $522,900 during the third quarter
of 2008 to $159,100 during the third quarter of 2009.
Contract drilling expense for our operations in Brazil increased $7.5 million during the third
quarter of 2009 compared to the same period in 2008, primarily due to inclusion of costs associated
with operation of the Ocean Quest offshore Brazil. The increase in costs during the third quarter
of 2009 was partially offset by the absence of costs associated with the repair of the Ocean
Clippers propulsion system incurred in the third quarter of 2008.
Intermediate Semisubmersibles.
Three Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
INTERMEDIATE SEMISUBMERSIBLES: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 16,935 | $ | 32,543 | $ | (15,608 | ) | |||||
Mexico |
55,174 | 54,153 | 1,021 | |||||||||
Australia/Asia/Middle East |
90,843 | 90,566 | 277 | |||||||||
Europe/Africa/Mediterranean |
145,001 | 135,412 | 9,589 | |||||||||
South America |
113,192 | 89,217 | 23,975 | |||||||||
Total Contract Drilling Revenue |
$ | 421,145 | $ | 401,891 | $ | 19,254 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 5,570 | $ | 12,678 | $ | 7,108 | ||||||
Mexico |
11,638 | 12,934 | 1,296 | |||||||||
Australia/Asia/Middle East |
32,838 | 41,179 | 8,341 | |||||||||
Europe/Africa/Mediterranean |
36,218 | 49,742 | 13,524 | |||||||||
South America |
55,892 | 45,478 | (10,414 | ) | ||||||||
Total Contract Drilling Expense |
$ | 142,156 | $ | 162,011 | $ | 19,855 | ||||||
OPERATING INCOME |
$ | 278,989 | $ | 239,880 | $ | 39,109 | ||||||
GOM. We currently have one intermediate semisubmersible rig, the Ocean Saratoga,
operating in the GOM due to the relocation of the Ocean Ambassador to Brazil early in the third
quarter of 2009. Revenues for the Ocean Saratoga decreased $8.3 million in the third quarter of
2009 compared to the same quarter of 2008, primarily due to a decrease in average operating dayrate
from $287,100 in the third quarter of 2008 to $196,700 during the third quarter of 2009. The Ocean
Ambassador generated revenues of $6.1 million and incurred operating expenses of $7.4 million
during the third quarter of 2008 while operating in the GOM.
Australia/Asia/Middle East. Operating revenue for our intermediate semisubmersibles working
in the Australia/Asia/Middle East region remained constant, comparing the third quarter of 2009 to
the third quarter of 2008. The Ocean General, which was undergoing a special survey during the
majority of the third quarter of 2008, generated an additional $19.7 million during the third
quarter of 2009. However, the favorable contribution by the
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Ocean General was mostly offset by the negative effect of the ready-stacking of the Ocean Bounty in
mid-July 2009 and an out-of-period adjustment for disputed revenue for the Ocean Patriot.
Operating costs in the Australia/Asia/Middle East region decreased $8.3 million in the third
quarter of 2009, compared to the prior year period, primarily due to the absence of costs
associated with the 2008 special surveys of the Ocean Bounty and Ocean General and reduced
personnel-related costs for the Ocean Bounty. These reductions in costs were partially offset by
additional costs associated with mobilizing the Ocean Bounty to a stack location in Singapore.
Europe/Africa/Mediterranean. Operating revenue for our intermediate semisubmersibles working
in the Europe/Africa/Mediterranean region increased $9.6 million in the third quarter of 2009
compared to the same period in 2008. Our four rigs currently operating in the North Sea (both U.K.
and Norwegian sectors) contributed $7.3 million in additional revenue during the third quarter of
2009. Average utilization increased to 94% for the third quarter of 2009, compared to 87% during
the third quarter of 2008, and resulted in the generation of $8.6 million in additional revenues.
The favorable contribution from the increase in North Sea utilization was partially offset by a
decrease in average operating revenue per day from $351,100 during the third quarter of 2008 to
$346,300 for the comparable period of 2009, resulting in a $1.3 million decline in revenues. The
Ocean Lexington completed its contract in the Mediterranean and mobilized to a shipyard in Cadiz,
Spain in the third quarter of 2009 to prepare for its upcoming contract offshore Brazil. In
connection with the completion of its Egyptian contract, the Ocean Lexington earned a $7.5 million
demobilization fee.
Contract drilling expense for our intermediate semisubmersible rigs operating in the
Europe/Africa/Mediterranean markets decreased $13.5 million in the third quarter of 2009 compared
to the third quarter of 2008, primarily due to the absence of costs related to surveys and
scheduled shipyard work that occurred during the third quarter of 2008.
South America. Revenues generated by our intermediate semisubmersibles working in the South
American region increased $24.0 million in the third quarter of 2009 compared to the same period in
2008. With the relocation of the Ocean Ambassador from the GOM to Brazil in the second quarter of
2009, we now have seven semisubmersible drilling rigs operating in the region. Our rigs operating
offshore Brazil earned average operating revenue per day of $221,400 during the third quarter of
2009, compared to $214,800 during the third quarter of 2008, and average utilization increased from
89% during the third quarter of 2008 to 91% for the same period in 2009.
The $10.4 million increase in operating costs in the region for the third quarter of 2009,
compared to the same quarter of 2008, is primarily the result of an additional rig operating in the
region, a higher cost structure for the Ocean Worker operating offshore Brazil compared to Trinidad
and Tobago, costs associated with the Ocean Yatzys 2009 survey and thruster change out and higher
freight and customs costs that are inherent in the region.
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Jack-Ups.
Three Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
JACK-UPS: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 8,001 | $ | 48,846 | $ | (40,845 | ) | |||||
Mexico |
26,994 | 27,364 | (370 | ) | ||||||||
Australia/Asia/Middle East |
38,131 | 27,720 | 10,411 | |||||||||
Europe/Africa/Mediterranean |
24,088 | 31,328 | (7,240 | ) | ||||||||
South America |
13,604 | 780 | 12,824 | |||||||||
Total Contract Drilling Revenue |
$ | 110,818 | $ | 136,038 | $ | (25,220 | ) | |||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 10,443 | $ | 24,895 | $ | 14,452 | ||||||
Mexico |
11,050 | 8,019 | (3,031 | ) | ||||||||
Australia/Asia/Middle East |
12,992 | 12,244 | (748 | ) | ||||||||
Europe/Africa/Mediterranean |
9,180 | 10,330 | 1,150 | |||||||||
South America |
8,894 | 2,671 | (6,223 | ) | ||||||||
Total Contract Drilling Expense |
$ | 52,559 | $ | 58,159 | $ | 5,600 | ||||||
OPERATING INCOME |
$ | 58,259 | $ | 77,879 | $ | (19,620 | ) | |||||
GOM. Revenue generated by our jack-up rigs operating in the GOM decreased $40.8 million
during the third quarter of 2009 compared to the third quarter of 2008. Average utilization
decreased to 27% during the third quarter of 2009 from 90% during the prior year quarter and
resulted in a $35.3 million reduction in revenues. In addition, average revenue per day for our
GOM jack-up fleet decreased to $53,700 for the third quarter of 2009 from $84,000 during the third
quarter of 2008, resulting in a $5.5 million reduction in revenues.
Contract drilling expense for our jack-ups operating in the GOM decreased $14.5 million during
the third quarter of 2009, compared to the same period in 2008, primarily due to a reduction in
operating costs as a result of the cold stacking of three of our mat-supported jack-up units in the
second quarter of 2009 and a reduction in operating costs for the Ocean Tower, which was taken out
of service after Hurricane Ike in September 2008.
Mexico. Revenue generated by our jack-up fleet operating offshore Mexico during the third
quarter of 2009 remained unchanged from the prior year quarter as revenues generated by the Ocean
Summit (which relocated from the GOM early in the third quarter of 2009) more than offset the
negative effect on revenues of a decrease in operating dayrate earned by the Ocean Nugget during
the rigs most recent contract extension.
The $3.0 million increase in operating costs during the third quarter of 2009, compared to the
third quarter of 2008, is primarily attributable to the inclusion of normal operating costs for the
Ocean Summit.
Australia/Asia/Middle East. Revenue generated by our jack-up rigs operating in the
Australia/Asia/Middle East region increased $10.4 million in the third quarter of 2009 compared to
the same period in 2008 primarily due to $8.6 million of incremental revenues earned by the Ocean
Shield.
Europe/Africa/Mediterranean. Revenue generated by our jack-up rigs operating in the
Europe/Africa/Mediterranean region decreased $7.2 million during the third quarter of 2009 compared
to the same period in 2008. The decrease in revenue was primarily due to both of our jack-up rigs
operating offshore Egypt during the third quarter of 2009 earning lower dayrates than those earned
during the same quarter of the prior year. Average operating revenue per day decreased from
$171,100 during the third quarter of 2008 to $89,200 for the third quarter of 2009, reducing
revenues by $8.2 million.
Operating costs in the Europe/Africa/Mediterranean region decreased $1.1 million during the
third quarter of 2009, compared to the same quarter in 2008, primarily due to the absence of costs
associated with the relocation of the Ocean Heritage from the Middle East to Egypt during late June
2008.
South America. Our newly constructed jack-up rig, the Ocean Scepter, began operating offshore
Argentina late in the third quarter of 2008. The rig generated $13.6 million in revenues and
incurred $8.9 million in contract
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drilling expense during the third quarter of 2009, prior to completion of its contract offshore
Argentina in July 2009. The rig is currently ready stacked in a shipyard in Uruguay.
Depreciation.
Depreciation expense increased $14.3 million to $86.5 million during the third quarter of 2009
compared to $72.2 million during the same period in 2008, primarily due to depreciation associated
with capital additions in 2008 and 2009, including depreciation of our two newly constructed
jack-ups, the Ocean Shield and Ocean Scepter, our recently upgraded high specification floater, the
Ocean Monarch, and the recently acquired Ocean Courage.
Casualty Loss.
During the third quarter of 2008, we wrote off certain equipment of our jack-up rig, the Ocean
Tower, that was damaged during Hurricane Ike. We wrote off the net book value of the Ocean Towers
derrick, drill floor and related equipment lost in the storm of approximately $2.6 million and
accrued $3.7 million in estimated salvage costs for recovery of equipment from the ocean floor.
Interest Expense.
Interest expense for the quarters ended September 30, 2009 and 2008 relates primarily to
interest accrued on our outstanding indebtedness, net of capitalized interest, and our liabilities
for uncertain tax positions. During the third quarter of 2009, interest expense included $7.4
million related to our 5.875% Senior Notes due May 1, 2019, or 5.875% Senior Notes, issued in May
2009. During the third quarter of 2008, we capitalized interest of $4.0 million related to the
construction of the Ocean Shield and the upgrade of the Ocean Monarch, which were both completed in
2008. We have no current rig construction or upgrade projects that qualify for interest
capitalization.
Foreign Currency Transaction Gain (Loss).
Foreign currency transaction gains (losses) include gains and losses from the settlement of
foreign currency forward exchange contracts and unrealized gains and losses from mark-to-market
accounting for our foreign currency derivatives not designated as accounting hedges. Such gains
and losses fluctuate based on the level of transactions in foreign currencies, as well as
fluctuations in such currencies. During the third quarter of 2009, we recognized net foreign
currency exchange gains of $8.3 million, including $32,000 in net realized and unrealized losses on
foreign currency forward exchange contracts. During the third quarter of 2008, we recognized net
foreign currency exchange losses of $29.0 million, including $28.7 million in net unrealized losses
resulting from mark-to-market accounting on open positions at September 30, 2008, partially offset
by $3.6 million net realized gains on settlement of foreign currency derivatives.
Income Tax Expense.
Our estimated annual effective tax rate for the three months ended September 30, 2009 was
24.0%, compared to the 29.5% effective tax rate for the same period in 2008. The lower effective
tax rate in the current quarter is a result of differences in the mix of our domestic and
international pre-tax earnings and losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Also contributing to the lower effective tax in the current
period was a repatriation of earnings by one of our wholly owned foreign subsidiaries, Diamond East
Asia Limited, to one of our wholly owned domestic subsidiaries. The repatriation brought with it
associated foreign tax credits that were previously unrecognized.
During the three months ended September 30, 2009 we reached an agreement with the Internal
Revenue Service to settle the audits of the tax years 2004 through 2006 for total additional income
tax expense of $55,000. Return to provision adjustments made during the three months ended
September 30, 2009 that were associated with the filing of our 2008 tax returns in various
jurisdictions resulted in additional tax expense of $11.0 million.
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Nine Months Ended September 30, 2009 and 2008
Comparative data relating to our revenue and operating expenses by equipment type are listed
below.
Nine Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
High-Specification Floaters |
$ | 999,979 | $ | 979,313 | $ | 20,666 | ||||||
Intermediate Semisubmersibles |
1,303,907 | 1,239,711 | 64,196 | |||||||||
Jack-ups |
360,561 | 369,895 | (9,334 | ) | ||||||||
Total Contract Drilling Revenue |
$ | 2,664,447 | $ | 2,588,919 | $ | 75,528 | ||||||
Revenues Related to Reimbursable Expenses |
$ | 76,055 | $ | 51,931 | $ | 24,124 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
High-Specification Floaters |
$ | 295,877 | $ | 275,171 | $ | (20,706 | ) | |||||
Intermediate Semisubmersibles |
405,567 | 437,521 | 31,954 | |||||||||
Jack-ups |
187,710 | 153,260 | (34,450 | ) | ||||||||
Other |
17,592 | 6,764 | (10,828 | ) | ||||||||
Total Contract Drilling Expense |
$ | 906,746 | $ | 872,716 | $ | (34,030 | ) | |||||
Reimbursable Expenses |
$ | 75,019 | $ | 50,660 | $ | (24,359 | ) | |||||
OPERATING INCOME |
||||||||||||
High-Specification Floaters |
$ | 704,102 | $ | 704,142 | $ | (40 | ) | |||||
Intermediate Semisubmersibles |
898,340 | 802,190 | 96,150 | |||||||||
Jack-ups |
172,851 | 216,635 | (43,784 | ) | ||||||||
Other |
(17,592 | ) | (6,764 | ) | (10,828 | ) | ||||||
Reimbursable expenses, net |
1,036 | 1,271 | (235 | ) | ||||||||
Depreciation |
(256,978 | ) | (212,150 | ) | (44,828 | ) | ||||||
General and administrative expense |
(48,109 | ) | (45,434 | ) | (2,675 | ) | ||||||
Casualty loss |
| (6,281 | ) | 6,281 | ||||||||
Gain on disposition of assets |
365 | 505 | (140 | ) | ||||||||
Total Operating Income |
$ | 1,454,015 | $ | 1,454,114 | $ | (99 | ) | |||||
Other income (expense): |
||||||||||||
Interest income |
3,645 | 10,369 | (6,724 | ) | ||||||||
Interest expense |
(26,436 | ) | (6,226 | ) | (20,210 | ) | ||||||
Foreign currency transaction gain (loss) |
17,921 | (14,606 | ) | 32,527 | ||||||||
Other, net |
315 | 333 | (18 | ) | ||||||||
Income before income tax expense |
1,449,460 | 1,443,984 | 5,476 | |||||||||
Income tax expense |
(349,305 | ) | (426,780 | ) | 77,475 | |||||||
NET INCOME |
$ | 1,100,155 | $ | 1,017,204 | $ | 82,951 | ||||||
Operating income for the first nine months of 2009 was constant compared to the first
nine months of 2008. During 2009, our contracted revenue backlog has allowed us to partially
mitigate the impact of the global economic recession on our industry, resulting in a $75.5 million
increase in revenues for the first nine months of 2009 compared to the same period of 2008. The
Ocean Monarch, which began service in mid-March 2009 after a major upgrade, generated $84.0 million
in revenues during the first nine months of 2009. Our two newbuild jack-up rigs, the Ocean Shield
and Ocean Scepter, contributed incremental revenues of $100.8 million during the first nine months
of 2009 compared to the same period in 2008. However, our operating results also reflect the
negative impact of ready-stacking the Ocean Star, Ocean Bounty and Ocean Scepter and the cold
stacking of our three mat-supported GOM jack-up rigs. In addition, the international jack-up
market, which had been strong throughout the majority of 2008, also reflected softening demand and
reduced dayrates during the first nine months of 2009.
Total contract drilling expense increased $34.0 million, or 4%, during the first nine months
of 2009 compared to the same period in 2008. Operating costs during the 2009 period are inclusive
of normal operating costs for the recently upgraded Ocean Monarch and our two new jack-ups.
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Depreciation expense increased $44.8 million to $257.0 million during the first nine months of
2009, or 17% compared to the first nine months of 2008, due to a higher depreciable asset base.
High-Specification Floaters.
Nine Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
HIGH-SPECIFICATION FLOATERS: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 730,166 | $ | 787,656 | $ | (57,490 | ) | |||||
Australia/Asia/Middle East |
114,584 | 51,907 | 62,677 | |||||||||
Europe/Africa/Mediterranean |
10,499 | | 10,499 | |||||||||
South America |
144,730 | 139,750 | 4,980 | |||||||||
Total Contract Drilling Revenue |
$ | 999,979 | $ | 979,313 | $ | 20,666 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 194,147 | $ | 163,314 | $ | (30,833 | ) | |||||
Australia/Asia/Middle East |
23,954 | 25,079 | 1,125 | |||||||||
Europe/Africa/Mediterranean |
3,008 | | (3,008 | ) | ||||||||
South America |
74,768 | 86,778 | 12,010 | |||||||||
Total Contract Drilling Expense |
$ | 295,877 | $ | 275,171 | $ | (20,706 | ) | |||||
OPERATING INCOME |
$ | 704,102 | $ | 704,142 | $ | (40 | ) | |||||
GOM. Revenues generated by our high-specification floaters operating in the GOM
decreased $57.5 million during the first nine months of 2009 compared to the same period in 2008.
Average utilization for our high-specification rigs operating in the GOM, excluding the Ocean
Monarch, decreased from 93% in the first nine months of 2008 to 76% in the first nine months of
2009, resulting in a $200.6 million decrease in revenues comparing the periods. The decrease in
utilization in the first nine months of 2009 was primarily due to downtime associated with contract
preparation activities and relocation of the Ocean Quest to Brazil late in the first quarter of
2009 and the Ocean Valiant to Angola in the third quarter of 2009, a higher number of scheduled
downtime days for special surveys and repairs during the first nine months of 2009 compared to the
first nine months of 2008 and 194 ready-stacked days for two of our rigs.
Average operating revenue per day for our high-specification floaters in this market,
excluding the Ocean Monarch, increased to $420,500 during the first nine months of 2009 compared to
$387,400 in the first nine months of 2008, resulting in additional revenues of $59.2 million. The
Ocean Monarch began operating in the GOM late in the first quarter of 2009 and generated revenues
of $84.0 million during the first nine months of 2009.
Operating costs during the first nine months of 2009 for our high-specification floaters in
the GOM increased by $30.8 million to $194.1 million compared to the first nine months of 2008.
The overall increase in operating costs for the first nine months of 2009 compared to the same
period of 2008 was primarily due to higher survey, repair and mobilization costs (primarily for the
Ocean America), as well as the inclusion of normal operating costs for the Ocean Monarch, which
began operating under contract in mid-March 2009. These cost increases were partially offset by
lower operating costs for the Ocean Quest and Ocean Valiant, which we relocated to Brazil and
Angola, respectively.
Australia/Asia/Middle East. During the first nine months of 2009, our high-specification rig
operating offshore Malaysia, the Ocean Rover, generated $62.7 million in additional revenues
compared to the first nine months of 2008 primarily due to an increase in average operating revenue
per day from $238,400 during the first nine months of 2008 to $428,000 during the first nine months
of 2009 ($50.8 million). An increase in utilization for the first nine months of 2009 compared to
the same period in 2008, when the rig had 51 days of scheduled downtime for a special survey and
related repairs, resulted in the generation of $11.9 million in incremental revenues.
Europe/Africa/Mediterranean. The Ocean Valiant, which we relocated to offshore Angola at the
beginning of the third quarter of 2009, generated revenues of $10.5 million and incurred operating
expenses of $3.0 million.
South America. Revenues earned by our high-specification floaters operating offshore Brazil
in the first nine months of 2009 increased $5.0 million compared to the first nine months of 2008.
The increase in revenue was
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primarily due to the relocation of the Ocean Quest from the GOM late in the first quarter of 2009
($53.0 million) and an increase in utilization of our Brazil fleet from 51% during the first nine
months of 2008 to 90% in the same period in 2009 ($11.4 million), as a result of 79 incremental rig
operating days during the 2009 period. Average operating revenue per day for the Ocean Alliance
decreased from $420,900 during the first nine months of 2008 to $189,100 during the first nine
months of 2009 and resulted in a $58.1 million reduction in revenues.
Contract drilling expense for our operations in Brazil decreased $12.0 million during the
first nine months of 2009 compared to the same period in 2008, primarily due to a reduction in
costs attributable to a 2008 survey of the Ocean Clipper and repairs to its propulsion system.
Cost reductions for the first nine months of 2009, compared to the same period in 2008, were
partially offset by the inclusion of normal operating costs for the Ocean Quest.
Intermediate Semisubmersibles.
Nine Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
INTERMEDIATE SEMISUBMERSIBLES: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 114,495 | $ | 107,675 | $ | 6,820 | ||||||
Mexico |
165,055 | 173,825 | (8,770 | ) | ||||||||
Australia/Asia/Middle East |
328,421 | 270,522 | 57,899 | |||||||||
Europe/Africa/Mediterranean |
407,748 | 391,905 | 15,843 | |||||||||
South America |
288,188 | 295,784 | (7,596 | ) | ||||||||
Total Contract Drilling Revenue |
$ | 1,303,907 | $ | 1,239,711 | $ | 64,196 | ||||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 27,023 | $ | 29,913 | $ | 2,890 | ||||||
Mexico |
34,888 | 44,236 | 9,348 | |||||||||
Australia/Asia/Middle East |
90,229 | 112,736 | 22,507 | |||||||||
Europe/Africa/Mediterranean |
101,910 | 125,595 | 23,685 | |||||||||
South America |
151,517 | 125,041 | (26,476 | ) | ||||||||
Total Contract Drilling Expense |
$ | 405,567 | $ | 437,521 | $ | 31,954 | ||||||
OPERATING INCOME |
$ | 898,340 | $ | 802,190 | $ | 96,150 | ||||||
GOM. Revenues generated during the first nine months of 2009 by our intermediate
semisubmersible fleet operating in the GOM increased $6.8 million, compared to the same period in
2008, while operating expenses decreased $2.9 million, comparing the same periods. The increase in
revenues is primarily due to the relocation of the Ocean Ambassador to the GOM from Mexico in the
second quarter of 2008 ($20.0 million), partially offset by a decrease in operating dayrate earned
by the Ocean Saratoga during the first nine months of 2009 compared to the first nine months of
2008.
The increase in operating costs for the first nine months of 2009, primarily attributable to
the inclusion of normal operating expenses for the Ocean Ambassador, were partially offset by a
reduction in costs for the Ocean Yorktown, which mobilized to Brazil in May 2008.
Mexico. Revenues generated and contract drilling expense incurred by our intermediate
semisubmersibles operating offshore Mexico decreased $8.8 million and $9.3 million, respectively,
during the first nine months of 2009 compared to the first nine months of 2008, primarily due to
the relocation of the Ocean Ambassador to the GOM.
Australia/Asia/Middle East. Operating revenue for our intermediate semisubmersibles working
in the Australia/Asia/Middle East region increased $57.9 million in the first nine months of 2009
compared to the same period in 2008. An increase in average operating revenue per day from
$295,900 during the first nine months of 2008 to $329,700 during the first nine months of 2009
generated additional revenues of $43.1 million during the first nine months of 2009.
Average utilization in this region increased to 91% during the first nine months of 2009 from
83% during the first nine months of 2008 and contributed $17.6 million in additional revenues. The
increase in utilization was
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primarily attributable to a reduction in downtime for the Ocean Patriot during the first nine
months of 2009 compared to the comparable period of 2008 when the rig incurred 64 days of unpaid,
scheduled downtime for a special survey.
Contract drilling expense for the Australia/Asia/Middle East region decreased $22.5 million in
the first nine months of 2009 compared to the first nine months of 2008, primarily due to the
absence of costs associated with the Ocean Patriots special survey in 2008 and reduced costs for
the Ocean Bounty, which completed drilling operations offshore Australia in July 2009 and is ready
stacked in a shipyard in Malaysia.
Europe/Africa/Mediterranean. Operating revenue for our intermediate semisubmersibles working
in the Europe/Africa/Mediterranean region increased $15.8 million in the first nine months of 2009
compared to the same period in 2008, primarily due to higher dayrates earned by three of our four
rigs in the North Sea (both U.K. and Norwegian sectors). Average operating revenue per day for our
North Sea semisubmersibles increased from $311,100 in the first nine months of 2008 to $339,500 in
the first nine months of 2009, contributing $30.0 million in additional revenue during 2009.
Utilization for our North Sea semisubmersibles decreased from 93% during the first nine months of
2008 to 89% for the first nine months of 2009, resulting in a $20.0 million reduction in revenues.
The Ocean Guardian is currently in an Invergordon, Scotland shipyard for a survey and contract
preparation activities in advance of its upcoming contract in the Falkland Islands.
The Ocean Lexington generated an additional $5.8 million operating offshore Libya during the
first four and one-half months of 2009 and offshore Egypt in mid-May of 2009 compared to operating
offshore Egypt the entire first nine months of 2008.
Contract drilling expense for our intermediate semisubmersible rigs operating in the
Europe/Africa/Mediterranean markets decreased $23.7 million in the first nine months of 2009
compared to the first nine months of 2008, primarily due to lower labor and personnel related costs
for our rigs operating in the North Sea, including the reversal of a previously recorded reserve
for paid time off for our U.K. national employees, and the absence of costs associated with
regulatory surveys for the Ocean Guardian and Ocean Nomad during the first nine months of 2008.
The decrease in operating costs during the first nine months of 2009 was partially offset by an
increase in costs associated with the completion of a scheduled survey of the Ocean Princess during
the first quarter of 2009.
South America. Revenues generated by our intermediate semisubmersibles working in the South
American region decreased $7.6 million in the first nine months of 2009 compared to the same period
in 2008. During the first nine months of 2008, the Ocean Worker earned $42.5 million of additional
revenues associated with the amortization of deferred mobilization revenue and a higher dayrate
while operating offshore Trinidad and Tobago, compared to the same period in 2009 while operating
offshore Brazil. However, due to rig moves into the region and subsequent acceptance by the
customer, our semisubmersible fleet offshore Brazil logged 87 incremental rig operating days during
the first nine months of 2009 compared to the first nine months of 2008, contributing a net $34.9
million in additional revenues during the first nine months of 2009. Including the Ocean Worker,
we currently have seven intermediate semisubmersible rigs operating offshore Brazil.
Our seven intermediate semisubmersibles operating offshore Brazil incurred $151.5 million in
operating expense during the first nine months of 2009, or a $26.5 million increase in costs
compared to the same period in 2008. The increase in costs in the South American region reflect
the increase in number of rigs in the region, including higher maintenance and other costs
associated with customer acceptance testing and the amortization of costs associated with the
mobilization of our rigs into the region. In addition, the increased operating costs reflect
higher freight and customs charges that are inherent in operations in the region.
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Jack-Ups.
Nine Months Ended | ||||||||||||
September 30, | Favorable/ | |||||||||||
2009 | 2008 | (Unfavorable) | ||||||||||
(In thousands) | ||||||||||||
JACK-UPS: |
||||||||||||
CONTRACT DRILLING REVENUE |
||||||||||||
GOM |
$ | 55,128 | $ | 141,710 | $ | (86,582 | ) | |||||
Mexico |
77,391 | 78,624 | (1,233 | ) | ||||||||
Australia/Asia/Middle East |
100,363 | 64,337 | 36,026 | |||||||||
Europe/Africa/Mediterranean |
72,143 | 84,444 | (12,301 | ) | ||||||||
South America |
55,536 | 780 | 54,756 | |||||||||
Total Contract Drilling Revenue |
$ | 360,561 | $ | 369,895 | $ | (9,334 | ) | |||||
CONTRACT DRILLING EXPENSE |
||||||||||||
GOM |
$ | 60,768 | $ | 72,098 | $ | 11,330 | ||||||
Mexico |
26,856 | 24,957 | (1,899 | ) | ||||||||
Australia/Asia/Middle East |
39,272 | 31,017 | (8,255 | ) | ||||||||
Europe/Africa/Mediterranean |
29,231 | 22,517 | (6,714 | ) | ||||||||
South America |
31,583 | 2,671 | (28,912 | ) | ||||||||
Total Contract Drilling Expense |
$ | 187,710 | $ | 153,260 | $ | (34,450 | ) | |||||
OPERATING INCOME |
$ | 172,851 | $ | 216,635 | $ | (43,784 | ) | |||||
GOM. Revenue generated by our jack-up rigs operating in the GOM decreased $86.6 million
during the first nine months of 2009 compared to the first nine months of 2008. Average
utilization decreased from 94% during the first nine months of 2008 to 39% during the first nine
months of 2009 due to a decrease in demand for rigs in the GOM, resulting in a $61.7 million
decrease in revenues. Our jack-up fleet in the GOM had 735 ready- and cold-stacked days during the
first nine months of 2009 compared to 22 ready-stacked days during the same period in 2008. As a
result of the depressed GOM market, we elected to cold stack and no longer actively market three of
our mat-supported jack-ups in this region. In addition, the Ocean Tower, which was taken out of
service due to damage sustained in a hurricane in the third quarter of 2008, generated revenues of
$33.1 million during the first nine months of 2008.
In contrast, average operating revenue per day in the first nine months of 2009 increased to
$85,400 from $78,200 in the first nine months of 2008, resulting in an $8.2 million increase in
revenue compared to the same period in 2008.
Contract drilling expense for our jack-ups operating in the GOM decreased $11.3 million during
the first nine months of 2009 compared to the same period in 2008, primarily due to significantly
reduced operating costs for the Ocean Tower and our three cold-stacked rigs. The decline in
operating costs was partially offset by survey and repair costs for the Ocean Titan and Ocean
Summit during the first nine months of 2009.
Australia/Asia/Middle East. Revenue generated by our jack-up rigs operating in the
Australia/Asia/Middle East region increased $36.0 million in the first nine months of 2009 compared
to the same period in 2008, including $46.0 million of additional revenues earned by the Ocean
Shield, which began operating late in the second quarter of 2008. The Ocean Heritage, which
generated $11.8 million in revenues during the first nine months of 2008, completed its contract
offshore Qatar during the first quarter of 2008 and was relocated to Egypt in late June 2008.
Contract drilling expense in the Australia/Asia/Middle East region increased $8.3 million
during the first nine months of 2009 compared to the same period in 2008 primarily due to the
addition of normal operating costs for the Ocean Shield and costs associated with the survey and
shipyard project costs for the Ocean Sovereign. The increased costs were partially offset by the
absence of operating costs for the Ocean Heritage during the first nine months of 2009.
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Europe/Africa/Mediterranean. Revenue generated by our jack-up rigs operating in the
Europe/Africa/Mediterranean region decreased $12.3 million during the first nine months of 2009
compared to the same period in 2008, primarily due to a $12.5 million reduction in revenues
generated by the Ocean Spur during the first nine months of 2009. During the first nine months of
2009, average operating revenue per day for the Ocean Spur decreased to $117,600 from $157,500
during the first nine months of 2008, resulting in a $10.9 million decrease in revenues comparing
the periods. However, utilization for the Ocean Spur increased to nearly 100% compared to 88% for
the first nine months of 2008 and resulted in the generation of $4.9 million in additional
revenues. During the first nine months of 2008, we recognized a $6.5 million lump-sum
demobilization fee earned by the Ocean Spur upon completion of its initial contract offshore Egypt.
The $6.7 million increase in operating expense in the region during the first nine months of
2009 compared to the same period in 2008 is primarily attributable to the inclusion of normal
operating costs for the Ocean Heritage.
South America. Our newly constructed jack-up rig, the Ocean Scepter, began operating offshore
Argentina late in the third quarter of 2008, generating $54.8 million in revenues and incurring
$28.9 million in contract drilling expense in the first nine months of 2009. The Ocean Scepter
completed its contract offshore Argentina in July 2009 and is currently ready stacked in a Uruguay
shipyard.
Depreciation.
Depreciation expense increased $44.8 million to $257.0 million during the first nine months of
2009 compared to $212.2 million during the same period in 2008. The increase in depreciation
expense is primarily due to depreciation associated with capital additions in 2008 and 2009,
including depreciation of our two newly constructed jack-ups, the Ocean Shield and Ocean Scepter,
our recently upgraded high specification floater, the Ocean Monarch and the recently acquired Ocean
Courage.
Casualty Loss.
During the first nine months of 2008, we wrote off certain equipment of our jack-up rig, the
Ocean Tower, that was damaged during Hurricane Ike. We wrote off the net book value of the Ocean
Towers derrick, drill floor and related equipment lost in the storm of approximately $2.6 million
and accrued $3.7 million in estimated salvage costs for recovery of equipment from the ocean floor.
Interest Income.
We earned interest income of $3.6 million for the nine months ended September 30, 2009
compared to $10.4 million during the nine months ended September 30, 2008. The $6.7 million
decrease in interest income is primarily the result of lower average interest-bearing cash balances
during the current year period compared to the nine months ended September 30, 2008.
Interest Expense.
Interest expense for the nine months ended September 30, 2009 and 2008 relates primarily to
interest accrued on our outstanding indebtedness, net of capitalized interest, and our liabilities
for uncertain tax positions. During the first nine months of 2009, interest expense included $12.1
million related to our 5.875% Senior Notes issued in May 2009, partially offset by the reversal of
$5.5 million previously accrued interest expense related to an uncertain tax position for which the
statute of limitations had expired (see Income Tax Expense). During the first nine months of
2008, we capitalized interest of $14.8 million related to the construction of the Ocean Scepter and
Ocean Shield and the upgrade of the Ocean Monarch, which were all completed in 2008. We have no
current rig construction or upgrade projects that qualify for interest capitalization.
Foreign Currency Transaction Gain (Loss).
Foreign currency transaction gains (losses) include gains and losses from the settlement of
foreign currency forward exchange contracts and unrealized gains and losses from mark-to-market
accounting for our foreign currency derivatives not designated as accounting hedges. Such gains
and losses fluctuate based on the level of transactions in foreign currencies, as well as
fluctuations in such currencies. During the first nine months of 2009, we recognized net foreign
currency exchange gains of $17.9 million, including $8.8 million in net realized and unrealized
gains on foreign currency forward exchange contracts. During the first nine months of 2008, we
recognized net foreign currency exchange losses of $14.6 million, including $19.1 million in net
unrealized losses
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resulting from mark-to-market accounting on open positions at September 30, 2008, partially offset
by $11.2 million net realized gains on settlement of foreign currency derivatives.
Income Tax Expense.
Our estimated annual effective tax rate for the nine months ended September 30, 2009 was
24.0%, compared to the 29.5% effective tax rate for the same period in 2008. The lower effective
tax rate in the current period is a result of differences in the mix of our domestic and
international pre-tax earnings and losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Also contributing to the lower effective tax in the current
period was a repatriation of earnings by one of our wholly owned foreign subsidiaries, Diamond East
Asia Limited, to one of our wholly owned domestic subsidiaries. The repatriation brought with it
associated foreign tax credits that were previously unrecognized.
During the nine months ended September 30, 2009, we reached an agreement with the Internal
Revenue Service to settle the audits of the tax years 2004 through 2006 for total additional income
tax expense of $55,000. Return to provision adjustments made during the nine months ended
September 30, 2009 that were associated with the filing of our 2008 tax returns in various
jurisdictions resulted in additional tax expense of $11.0 million.
On March 31, 2009, the statute of limitations relative to a 2003 uncertain tax position in
Mexico expired. As a consequence we reversed $5.5 million of previously accrued interest expense
and $5.9 million of previously accrued tax expense, $0.8 million of which had been accrued for
penalties. There was no comparable accrual reversal in the nine months ended September 30, 2008.
Sources of Liquidity and Capital Resources
Our principal sources of liquidity and capital resources are cash flows from our operations
and our cash reserves. We may also make use of our $285 million credit facility for cash
liquidity. See $285 Million Revolving Credit Facility.
At September 30, 2009, we had $250.8 million in Cash and cash equivalents and $0.9 million
in Investments and marketable securities, representing our investment of cash available for
current operations.
Cash Flows from Operations. Our cash flows from operations are impacted by the ability of our
customers to weather the continuing current global financial and credit crisis, as well as the
volatility in energy prices. In general, before working for a customer with whom we have not had a
prior business relationship and/or whose financial stability may appear uncertain to us, we perform
a credit review on that company. Based on that analysis, we may require that the customer present
a letter of credit, prepay or provide other credit enhancements. Tightening of the credit markets
may preclude us from doing business with potential customers and could have an impact on our
existing customers, causing them to fail to meet their obligations to us, including attempts to
renegotiate existing contract terms. In addition, we may offer inducements to our customers to
extend existing contracts. For example, we recently reached an agreement with one of our customers
in the GOM for a second one-year contract extension. In exchange for the extension, we agreed to a
varying dayrate structure which provides for lower dayrates during the four-month period when the
rig is restricted from operating during hurricane season, and higher dayrates at other times.
During the second quarter of 2009, one of our customers sought short-term financial relief
with respect to an existing contractual agreement with us for a six-well, one-year minimum contract
term, program that began in May 2009. As a result, we agreed to amend our existing contract with
this customer, and in consideration of this amendment, we are to receive a $20,000 per day increase
in the total contractual operating dayrate, to a total of $560,000 per day, for a minimum of the
first 240 days of the initial one-year contract. Under the terms of the amended agreement, the
customer is obligated to pay us $75,000 per day in accordance with our normal credit terms (30 days
after receipt of invoice). The remainder of the dayrate for the six well program (minimum of 240
days) will be paid through the conveyance of a 27% net profit interest, or NPI, in a minimum of
five developmental oil-and-gas producing properties covering six wells owned by the customer.
Based on the current production payout estimate, we anticipate that the first payment from the
conveyance of the NPI will commence in early 2010. Payment of such amounts, and the timing of such
payments, are contingent upon such production and upon energy sale prices. The residual days under
the initial one-year (365 day) contract will be deferred until the fourth quarter of 2011 when the
customer will utilize the rig at the originally contracted dayrate and provide a 25% up-front
escrow payment with the remaining 75% to be paid in accordance with normal credit terms. At
September 30, 2009, the portion of our trade receivable that is expected to be paid from the NPI
was $55.5 million and is presented as Accounts Receivable in our Consolidated Balance Sheets
included in Item 1 of Part I of this report.
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These external factors which affect our cash flows from operations are not within our control
and are difficult to predict. For a description of other factors that could affect our cash flows
from operations, see - Overview Industry Conditions, Forward-Looking Statements, and Risk
Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and Item
1A of Part II, Risk Factors, included in our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009.
5.70% Senior Notes. On October 8, 2009, we issued $500.0 million aggregate principal amount
of our 5.70% Senior Notes due 2039, or 5.70% Senior Notes, for general corporate purposes. The
5.70% Senior Notes were issued at an offering price of 99.344% of the principal and resulted in net
proceeds to us of approximately $491.9 million, exclusive of accrued issuance costs.
The notes bear interest at 5.70% per year, payable semiannually in arrears on April 15 and
October 15 of each year, beginning April 15, 2010, and mature on October 15, 2039. The 5.70%
Senior Notes are unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc., or
DODI, and rank equal in right of payment to existing and future unsecured and unsubordinated
indebtedness of DODI. We have the right to redeem all or a portion of these notes for cash at any
time or from time to time, on at least 15 days but not more than 60 days prior written notice, at
the redemption price specified in the governing indenture plus accrued and unpaid interest to the
date of redemption.
5.875% Senior Notes. On May 4, 2009, we issued $500.0 million aggregate principal amount of
our 5.875% Senior Notes, for general corporate purposes. The 5.875% Senior Notes were issued at an
offering price of 99.851% of the principal and resulted in net proceeds to us of approximately
$495.5 million, exclusive of accrued issuance costs.
The notes bear interest at 5.875% per year, payable semiannually in arrears on May 1 and
November 1 of each year, beginning November 1, 2009, and mature on May 1, 2019. The 5.875% Senior
Notes are unsecured and unsubordinated obligations of DODI and rank equal in right of payment to
existing and future unsecured and unsubordinated indebtedness of DODI. We have the right to redeem
all or a portion of these notes for cash at any time or from time to time, on at least 15 days but
not more than 60 days prior written notice, at the redemption price specified in the governing
indenture plus accrued and unpaid interest to the date of redemption.
$285 Million Revolving Credit Facility. We maintain a $285 million syndicated, senior
unsecured revolving credit facility, or Credit Facility, for general corporate purposes, including
loans and performance or standby letters of credit, that will mature on November 2, 2011.
Loans under the Credit Facility bear interest at a rate per annum equal to, at our election,
either (i) the higher of the prime rate or the federal funds rate plus 0.5% or (ii) the London
Interbank Offered Rate, or LIBOR, plus an applicable margin, varying from 0.20% to 0.525%, based on
our current credit ratings. Under our Credit Facility, we also pay, based on our current credit
ratings, and as applicable, other customary fees, including, but not limited to, a facility fee on
the total commitment under the Credit Facility regardless of usage and a utilization fee that
applies if the aggregate of all loans outstanding under the Credit Facility equals or exceeds 50%
of the total commitment under the facility. Changes in credit ratings could lower or raise the
fees that we pay under the Credit Facility.
The Credit Facility contains customary covenants, including, but not limited to, the
maintenance of a ratio of consolidated indebtedness to total capitalization, as defined in the
Credit Facility, of not more than 60% at the end of each fiscal quarter and limitations on liens,
mergers, consolidations, liquidation and dissolution, changes in lines of business, swap
agreements, transactions with affiliates and subsidiary indebtedness.
Based on our current credit ratings at September 30, 2009, the applicable margin on LIBOR
loans would have been 0.24%. As of September 30, 2009, there were no loans outstanding under the
Credit Facility; however, $61.5 million in letters of credit were issued and outstanding under the
Credit Facility.
Shelf Registration. We have an effective Registration Statement on Form S-3 registering the
future sale of an unlimited amount of our debt and equity securities.
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Liquidity and Capital Requirements
Our liquidity and capital requirements are primarily a function of our working capital needs,
capital expenditures and debt service requirements. We determine the amount of cash required to
meet our capital commitments by evaluating the need to upgrade rigs to meet specific customer
requirements and by evaluating our ongoing rig equipment replacement and enhancement programs,
including water depth and drilling capability upgrades. We believe that our operating cash flows
and cash reserves will be sufficient to meet both our working capital requirements and our capital
commitments over the next twelve months; however, we will continue to make periodic assessments
based on industry conditions and will adjust capital spending programs if required.
In addition, we may, from time to time, issue debt or equity securities, or a combination
thereof, to finance capital expenditures, the acquisition of assets and businesses or for general
corporate purposes. Our ability to access the capital markets by issuing debt or equity securities
will be dependent on our results of operations, our current financial condition, current market
conditions and other factors beyond our control. We may also make use of our Credit Facility to
finance capital expenditures or for other general corporate purposes.
Contractual Cash Obligations. The following table sets forth our contractual cash obligations
at September 30, 2009.
Payments Due By Period | ||||||||||||||||||||
Less than 1 | After 5 | |||||||||||||||||||
Contractual Obligations | Total | year | 1 3 years | 4 5 years | years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt (principal and interest) (1) |
$ | 1,435,357 | $ | 58,545 | $ | 108,875 | $ | 358,875 | $ | 909,062 | ||||||||||
Operating leases |
3,991 | 2,737 | 1,152 | 102 | | |||||||||||||||
Total obligations |
$ | 1,439,348 | $ | 61,282 | $ | 110,027 | $ | 358,977 | $ | 909,062 | ||||||||||
(1) | Excludes $500.0 million in aggregate principal amount of our 5.70% Senior Notes issued on October 8, 2009. See 5.70% Senior Notes. |
The above table excludes foreign currency forward exchange contracts in the aggregate notional
amount of $87.5 million outstanding at September 30, 2009. See further information regarding these
contracts in Item 3, Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange
Risk and Note 4 Derivative Financial Instruments to our Consolidated Financial Statements in
Item 1 of Part I of this report.
As of September 30, 2009, the total unrecognized tax benefit related to uncertain tax
positions was $35.0 million. Due to the high degree of uncertainty regarding the timing of future
cash outflows associated with the liabilities recognized in this balance, we are unable to make
reasonably reliable estimates of the period of cash settlement with the respective taxing
authorities.
As of September 30, 2009, we had no purchase obligations for major rig upgrades or any other
significant obligations, except for those related to our direct rig operations, which arise during
the normal course of business.
Other Commercial Commitments Letters of Credit.
We were contingently liable as of September 30, 2009 in the amount of $164.8 million under
certain performance, bid, supersedeas and custom bonds and letters of credit, including $61.5
million in letters of credit issued under our Credit Facility, as described in the table below.
Eight of these bonds totaling $103.1 million were purchased from a related party after obtaining
competitive quotes. Agreements relating to approximately $95.7 million of performance bonds can
require collateral at any time. As of September 30, 2009, we had not been required to make any
collateral deposits with respect to these agreements. The remaining agreements cannot require
collateral except in events of default. On our behalf, banks have issued letters of credit
securing certain of these bonds.
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For the years ending December 31, | ||||||||||||||||
Total | 2009 | 2010 | Beyond | |||||||||||||
(In thousands) | ||||||||||||||||
Other Commercial Commitments |
||||||||||||||||
Customs bonds |
$ | 41,699 | $ | 41,640 | $ | 59 | $ | | ||||||||
Performance bonds |
109,478 | 580 | 90,042 | 18,856 | ||||||||||||
Other |
13,615 | 5,000 | 8,615 | | ||||||||||||
Total obligations |
$ | 164,792 | $ | 47,220 | $ | 98,716 | $ | 18,856 | ||||||||
Credit Ratings.
Our current credit rating is Baa1 for Moodys Investors Services and A- for Standard & Poors.
Although our long-term ratings continue at investment grade levels, lower ratings would result in
higher rates for borrowings under our Credit Facility and could also result in higher interest
rates on future debt issuances.
Capital Expenditures.
During 2009, we acquired two newbuild, dynamically positioned, semisubmersible drilling rigs
for an aggregate cost of $950.0 million, exclusive of final commissioning and initial mobilization
costs, drill string and other necessary capital spares. The Ocean Courage is currently en route to
the GOM, where it is expected to commence drilling operations in the first quarter of 2010. Our
most recent addition to the fleet, the Ocean Valor, is currently undergoing final commissioning in
Singapore. We are actively marketing the Ocean Valor for work commencing in early 2010.
We expect to spend approximately $140.0 million during the fourth quarter of 2009 for
additional capital expenditures associated with our ongoing rig equipment replacement and
enhancement programs, equipment required for our long-term international contracts and other
corporate requirements, as well as final commissioning costs and drill string and capital spare
purchases for our two newbuild semisubmersibles. During the first nine months of 2009, we spent
approximately $309.7 million towards these programs.
We expect to finance our 2009 capital expenditures through the use of our existing cash
balances or internally generated funds. From time to time, however, we may also make use of our
Credit Facility to finance capital expenditures.
Off-Balance Sheet Arrangements.
At September 30, 2009 and December 31, 2008, we had no off-balance sheet debt or other
arrangements.
Historical Cash Flows
The following is a discussion of our historical cash flows from operating, investing and
financing activities for the nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008.
Net Cash Provided by Operating Activities.
Nine Months Ended September 30, | ||||||||||||
2009 | 2008 | Change | ||||||||||
(In thousands) | ||||||||||||
Net income |
$ | 1,100,155 | $ | 1,017,204 | $ | 82,951 | ||||||
Net changes in operating assets and liabilities |
(333,667 | ) | (235,278 | ) | (98,389 | ) | ||||||
Proceeds from settlement of foreign currency
forward exchange contracts designated as
accounting hedges |
3,046 | | 3,046 | |||||||||
(Gain) loss on foreign currency forward
exchange contracts |
(11,852 | ) | 7,920 | (19,772 | ) | |||||||
Deferred tax provision |
57,984 | 33,862 | 24,122 | |||||||||
Depreciation and other non-cash items, net |
320,766 | 215,617 | 105,149 | |||||||||
$ | 1,136,432 | $ | 1,039,325 | $ | 97,107 | |||||||
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Our cash flows from operations during the first nine months of 2009 increased $97.1 million or
9% compared to the same period in 2008. The increase in cash flows from operations for the first
nine months of 2009 compared to the same period in 2008 is primarily the result of higher dayrates
earned by our floater fleet, most notably in the Australia/Asia markets, as well as contributions
to earnings by the newly constructed Ocean Scepter and Ocean Shield and the recently upgraded Ocean
Monarch. Deferred income and expenses, primarily related to rig mobilizations and customer
prepayments, generated cash of $49.1 million during the first nine months of 2009 compared to a
usage of $10.7 million during the same period of 2008.
We used an additional $98.4 million to satisfy our working capital needs during the first nine
months of 2009 compared to the first nine months of 2008. Trade and other receivables used cash of
$198.1 million during the first nine months of 2009 compared to $184.3 million during the same
period of 2008. We also used $21.0 million more cash during the first nine months of 2009 to
satisfy our operating liabilities compared to the same period in 2008. During the first nine
months of 2009, we made estimated U.S. federal income tax payments and paid foreign income taxes,
net of refunds, of $192.0 million and $143.0 million, respectively. During the first nine months
of 2008, we made estimated U.S. federal income tax payments and paid foreign income taxes of $330.0
million and $86.0 million, respectively.
Net Cash Used in Investing Activities.
Nine Months Ended September 30, | ||||||||||||
2009 | 2008 | Change | ||||||||||
(In thousands) | ||||||||||||
Purchase of marketable securities |
$ | (3,698,627 | ) | $ | (1,291,271 | ) | $ | (2,407,356 | ) | |||
Proceeds from sale of marketable securities |
4,098,868 | 1,293,742 | 2,805,126 | |||||||||
Capital expenditures (including rig acquisitions) |
(1,259,761 | ) | (487,662 | ) | (772,099 | ) | ||||||
(Cost of) proceeds from settlement of foreign
currency forward exchange contracts not designated as accounting hedges |
(28,772 | ) | 11,141 | (39,913 | ) | |||||||
Other investing activities |
7,391 | 2,802 | 4,589 | |||||||||
$ | (880,901 | ) | $ | (471,248 | ) | $ | (409,653 | ) | ||||
Our investing activities used $881.0 million during the first nine months of 2009 compared to
$471.2 million during the same period of 2008. During the first nine months of 2009, we sold
marketable securities, net of purchases, of $400.2 million compared to $2.5 million during the
first nine months of 2008. Our level of investment activity is dependent on our working capital
and other capital requirements during the year, as well as a response to actual or anticipated
events or conditions in the securities markets.
During the first nine months of 2009, we purchased two newbuild, dynamically positioned,
semisubmersible drilling rigs, the Ocean Valor and Ocean Courage, for an aggregate cost of $950.0
million. In addition, we spent approximately $309.7 million related to ongoing capital maintenance
programs, including rig modifications to meet contractual requirements, during the first nine
months of 2009. During the first nine months of 2008, we spent approximately $340.8 million
related to our capital maintenance programs and an additional $146.9 million related to the major
upgrade of the Ocean Monarch and construction of the Ocean Scepter and Ocean Shield.
During the first nine months of 2009, we received $6.0 million in deposits in connection with
the sale of the Ocean Tower, which was completed on October 26, 2009.
Beginning in the latter part of 2008, the strengthening U.S. dollar (or, conversely, the
weakening foreign currency) negatively impacted our expiring foreign currency forward exchange
contracts entered into as economic hedges of our foreign currency requirements and resulted in an
aggregate realized loss of $28.8 million for the first nine months of 2009. During the first nine
months of 2008, we recognized $11.1 million in realized gains on the settlement of foreign currency
forward exchange contracts. As of September 30, 2009, we had foreign currency exchange contracts
outstanding, in the aggregate notional amount of $87.5 million, consisting of $27.6 million in
Australian dollars, $18.0 million in Brazilian reais, $22.3 million in British pounds sterling,
$7.6 million in Mexican pesos and $12.0 million in Norwegian kroner. These contracts settle at
various times through March 2010.
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Net Cash Used in Financing Activities.
Nine Months Ended September 30, | ||||||||||||
2009 | 2008 | Change | ||||||||||
(In thousands) | ||||||||||||
Issuance of 5.875% Senior Notes, net of
issuance costs |
$ | 495,332 | $ | | $ | 495,332 | ||||||
Payment of dividends |
(836,621 | ) | (573,917 | ) | (262,704 | ) | ||||||
Proceeds from stock options exercised |
527 | 2,002 | (1,475 | ) | ||||||||
Other |
| 1,319 | (1,319 | ) | ||||||||
$ | (340,762 | ) | $ | (570,596 | ) | $ | 229,834 | |||||
During the first nine months of 2009, we paid cash dividends totaling $836.6 million,
consisting of aggregate quarterly regular cash dividends totaling $52.1 million, or $0.125 per
share of our common stock, and aggregate special cash dividends totaling $784.5 million, or $1.875
per share of our common stock per quarter. During the first nine months of 2008, we paid cash
dividends totaling $573.9 million, consisting of aggregate quarterly regular cash dividends
totaling $52.1 million, or $0.125 per share of our common stock, and aggregate special cash
dividends of $1.25 per share of our common stock per quarter, totaling $521.8 million.
On October 21, 2009, we declared a regular cash dividend and a special cash dividend of $0.125
and $1.875, respectively, per share of our common stock. Both the quarterly regular cash dividend
and the special cash dividends are payable on December 1, 2009 to stockholders of record on
November 2, 2009.
Our Board of Directors has adopted a policy to consider paying special cash dividends, in
amounts to be determined, on a quarterly basis. Our Board of Directors may, in subsequent
quarters, consider paying additional special cash dividends, in amounts to be determined, if it
believes that our financial position, earnings, earnings outlook, capital spending plans and other
relevant factors warrant such action at that time.
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. We did not repurchase any shares of our outstanding common stock
during the nine months ended September 30, 2009 or 2008.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605), Multiple Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues
Task Force, or ASU 2009-13. ASU 2009-13 addresses the accounting for multiple deliverable
arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. ASU 2009-13 changes the guidance provided in the FASB ASC Subtopic
605-25, Revenue Recognition -Multiple-Element Arrangements, or ASC-605-25, to allow the financial
reporting of revenue arrangements to reflect the underlying economics of transactions. The
amendments to ASC-605-25 will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We are currently
evaluating the impact that the adoption of the amendments to ASC-605-25 will have on our results of
operations and financial position, as well as the related disclosure requirements.
Forward-Looking Statements
We or our representatives may, from time to time, make or incorporate by reference certain
written or oral statements that are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of
historical fact are, or may be deemed to be, forward-looking statements. Forward-looking
statements include, without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain or be identified by the words
expect, intend, plan, predict, anticipate, estimate, believe, should, could,
may, might, will, will be, will continue, will likely result, project, forecast,
budget and similar expressions. Statements made by us in this report that contain
forward-looking statements include, but are not limited to, information concerning our possible or
assumed future results of operations and statements about the following subjects:
| future market conditions and the effect of such conditions on our future results of operations (see - Overview Industry Conditions); |
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| future uses of and requirements for financial resources (see Liquidity and Capital Requirements and - Sources of Liquidity and Capital Resources); |
| interest rate and foreign exchange risk (see Liquidity and Capital Requirements - Credit Ratings and Quantitative and Qualitative Disclosures About Market Risk); |
| future contractual obligations (see Overview Industry Conditions and - Liquidity and Capital Requirements); |
| market outlook; |
| future operations outside the United States including, without limitation, our operations in Mexico; |
| business strategy; |
| growth opportunities; |
| competitive position; |
| expected financial position; |
| future cash flows (see Overview Contract Drilling Backlog); |
| future regular or special dividends (see Historical Cash Flows); |
| financing plans (see Sources of Liquidity and Capital Resources and - Liquidity and Capital Requirements); |
| tax planning; |
| budgets for capital and other expenditures (see - Liquidity and Capital Requirements); |
| timing and cost of completion of rig upgrades, new construction and other capital projects (see - Liquidity and Capital Requirements); |
| delivery dates and drilling contracts related to rig conversion or upgrade projects or rig acquisitions; |
| plans and objectives of management; |
| performance of contracts; |
| outcomes of legal proceedings; |
| compliance with applicable laws; and |
| adequacy of insurance or indemnification. |
These types of statements inherently are subject to a variety of assumptions, risks and
uncertainties that could cause actual results to differ materially from those expected, projected
or expressed in forward-looking statements. These risks and uncertainties include, among others,
the following:
| general economic and business conditions, including the extent and duration of the current credit crisis and recession; |
| worldwide demand for oil and natural gas; |
| changes in foreign and domestic oil and gas exploration, development and production activity; |
| oil and natural gas price fluctuations and related market expectations; |
| the ability of the Organization of Petroleum Exporting Countries, commonly called OPEC, to set and maintain production levels and pricing, and the level of production in non-OPEC countries; |
| policies of various governments regarding exploration and development of oil and gas reserves; |
| advances in exploration and development technology; |
| the worldwide political and military environment, including in oil-producing regions; |
| casualty losses; |
| operating hazards inherent in drilling for oil and gas offshore; |
| the risk of physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico; |
| industry fleet capacity; |
| market conditions in the offshore contract drilling industry, including dayrates and utilization levels; |
| competition; |
| changes in foreign, political, social and economic conditions; |
| risks of international operations, compliance with foreign laws and taxation policies and expropriation or nationalization of equipment and assets; |
| risks of potential contractual liabilities pursuant to our various drilling contracts in effect from time to time; |
| the risk that an LOI may not result in a definitive agreement; |
| foreign exchange and currency fluctuations and regulations, and the inability to repatriate income or capital; |
| risks of war, military operations, other armed hostilities, terrorist acts and embargoes; |
| changes in offshore drilling technology, which could require significant capital expenditures in order to maintain competitiveness; |
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| regulatory initiatives and compliance with governmental regulations; |
| compliance with environmental laws and regulations; |
| development and exploitation of alternative fuels; |
| customer preferences; |
| effects of litigation; |
| cost, availability and adequacy of insurance; |
| the risk that future regular or special dividends may not be declared; |
| adequacy of our sources of liquidity; |
| the availability of qualified personnel to operate and service our drilling rigs; and |
| various other matters, many of which are beyond our control. |
The risks and uncertainties included here are not exhaustive. Other sections of this report
and our other filings with the Securities and Exchange Commission include additional factors that
could adversely affect our business, results of operations and financial performance. Given these
risks and uncertainties, investors should not place undue reliance on forward-looking statements.
Forward-looking statements included in this report speak only as of the date of this report. We
expressly disclaim any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement to reflect any change in our expectations with regard to the
statement or any change in events, conditions or circumstances on which any forward-looking
statement is based.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The information included in this Item 3 is considered to constitute forward-looking
statements for purposes of the statutory safe harbor provided in Section 27A of the Securities Act
and Section 21E of the Exchange Act. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Forward-Looking Statements in Item 2 of Part I of this
report.
Our measure of market risk exposure represents an estimate of the change in fair value of our
financial instruments. Market risk exposure is presented for each class of financial instrument
held by us at September 30, 2009 and December 31, 2008, assuming immediate adverse market movements
of the magnitude described below. We believe that the various rates of adverse market movements
represent a measure of exposure to loss under hypothetically assumed adverse conditions. The
estimated market risk exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss or any expected actual loss, even under adverse conditions,
because actual adverse fluctuations would likely differ. In addition, since our investment
portfolio is subject to change based on our portfolio management strategy as well as in response to
changes in the market, these estimates are not necessarily indicative of the actual results that
may occur.
Exposure to market risk is managed and monitored by our senior management. Senior management
approves the overall investment strategy that we employ and has responsibility to ensure that the
investment positions are consistent with that strategy and the level of risk acceptable to us. We
may manage risk by buying or selling instruments or entering into offsetting positions.
Interest Rate Risk
We have exposure to interest rate risk arising from changes in the level or volatility of
interest rates. Our investments in marketable securities are primarily in fixed maturity
securities. We monitor our sensitivity to interest rate risk by evaluating the change in the value
of our financial assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates by varying magnitudes on a static
balance sheet to determine the effect such a change in rates would have on the recorded market
value of our investments and the resulting effect on stockholders equity. The analysis presents
the sensitivity of the market value of our financial instruments to selected changes in market
rates and prices which we believe are reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of our interest sensitive
assets and liabilities that were held on September 30, 2009 and December 31, 2008, due to
instantaneous parallel shifts in the yield curve of 100 basis points, with all other variables held
constant.
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The interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and
does not provide a precise forecast of the effect of changes in market interest rates on our
earnings or stockholders equity. Further, the computations do not contemplate any actions we could
undertake in response to changes in interest rates.
Loans under our $285 million syndicated, senior unsecured revolving Credit Facility bear
interest at our option at a rate per annum equal to (i) the higher of the prime rate or the federal
funds rate plus 0.5% or (ii) LIBOR plus an applicable margin, varying from 0.20% to 0.525%, based
on our current credit ratings. As of September 30, 2009 and December 31, 2008, there were no loans
outstanding under the Credit Facility (however, $61.5 million and $58.1 million in letters of
credit were issued and outstanding under the Credit Facility at September 30, 2009 and December 31,
2008, respectively).
Our long-term debt, as of September 30, 2009 and December 31, 2008, is denominated in U.S.
dollars. Our debt has been primarily issued at fixed rates, and as such, interest expense would not
be impacted by interest rate shifts. The impact of a 100-basis point increase in interest rates on
fixed rate debt would result in a decrease in market value of $60.2 million and $20.9 million as of
September 30, 2009 and December 31, 2008, respectively. A 100-basis point decrease would result in
an increase in market value of $60.5 million and $21.6 million as of September 30, 2009 and
December 31, 2008, respectively.
Foreign Exchange Risk
Foreign exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will impact the value of financial instruments. It is customary for us to enter
into foreign currency forward exchange contracts in the normal course of business. These contracts
may require us to exchange predetermined amounts of foreign currencies on specified dates or to net
settle the spread between the contracted foreign currency exchange rate and the spot rate on the
contract settlement date, which for certain contracts is the average spot rate for the contract
period. As of September 30, 2009, we had foreign currency exchange contracts outstanding, in the
aggregate notional amount of $87.5 million, consisting of $27.6 million in Australian dollars,
$18.0 million in Brazilian reais, $22.3 million in British pounds sterling, $7.6 million in Mexican
pesos and $12.0 million in Norwegian kroner. These contracts settle at various times through March
2010.
At September 30, 2009, we have presented the fair value of our outstanding foreign currency
forward exchange contracts as a current asset of $6.2 million in Prepaid expenses and other
current assets and a current liability of $0.2 million in Accrued liabilities in our
Consolidated Balance Sheets.
The following table presents our exposure to market risk by category (interest rates and
foreign currency exchange rates):
Fair Value Asset (Liability) | Market Risk | |||||||||||||||
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest rate: |
||||||||||||||||
Marketable securities |
$ | 880 | (a) | $ | 400,592 | (a) | $ | (100 | ) (c) | $ | (2,000 | ) (c) | ||||
Long-term debt |
(1,054,980 | ) (b) | (470,040 | ) (b) | | | ||||||||||
Foreign Exchange: |
||||||||||||||||
Forward exchange
contracts asset
positions |
6,200 | (d) | | (8,100 | ) (e) | | ||||||||||
Forward exchange
contracts
liability positions |
(200 | ) (d) | (37,300 | ) (d) | (3,200 | ) (e) | (32,600 | ) (e) |
(a) | The fair market value of our investment in marketable securities, excluding repurchase agreements, is based on the quoted closing market prices on September 30, 2009 and December 31, 2008. | |
(b) | The fair values of our 4.875% Senior Notes due 2015 and 5.15% Senior Notes due 2014 are based on the quoted closing market prices on September 30, 2009 and December 31, 2008 from brokers of these instruments. The fair value of our Zero Coupon Convertible Debentures due 2020 is based on the closing market price of our common stock on September 30, 2009 and December 31, 2008 and the stated conversion rate for the debentures. The fair value of our 5.875% Senior Notes due 2019 is based on the quoted market price on September 30, 2009 from brokers of this instrument. |
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(c) | The calculation of estimated market risk exposure is based on assumed adverse changes in the underlying reference price or index of an increase in interest rates of 100 basis points at September 30, 2009 and December 31, 2008. | |
(d) | The fair value of our foreign currency forward exchange contracts is based on both quoted market prices and valuations derived from pricing models on September 30, 2009 and December 31, 2008. | |
(e) | The calculation of estimated foreign exchange risk assumes an instantaneous 20% decrease in the foreign currency exchange rates versus the U.S. dollar from their values at September 30, 2009 and December 31, 2008, with all other variables held constant. |
ITEM 4. Controls and Procedures.
We maintain a system of disclosure controls and procedures which are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the federal
securities laws, including this report, is recorded, processed, summarized and reported on a timely
basis. These disclosure controls and procedures include controls and procedures designed to ensure
that information required to be disclosed by us under the federal securities laws is accumulated
and communicated to our management on a timely basis to allow decisions regarding required
disclosure.
Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, participated in an
evaluation by our management of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009. Based on their
participation in that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were effective as of September 30, 2009.
There were no changes in our internal control over financial reporting identified in
connection with the foregoing evaluation that occurred during our third fiscal quarter of 2009 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 6. Exhibits.
See the Exhibit Index for a list of those exhibits filed or furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIAMOND OFFSHORE DRILLING, INC. (Registrant) |
||||
Date October 27, 2009 | By: | \s\ Gary T. Krenek | ||
Gary T. Krenek | ||||
Senior Vice President and Chief Financial Officer | ||||
Date October 27, 2009 | \s\ Beth G. Gordon | |||
Beth G. Gordon Controller (Chief Accounting Officer) |
||||
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EXHIBIT INDEX
Exhibit No. | Description | |||
3.1 | Amended and Restated Certificate of Incorporation of Diamond Offshore Drilling, Inc.
(incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2003) (SEC File No. 1-13926). |
|||
3.2 | Amended and Restated By-Laws (as amended through October 22, 2007) of Diamond Offshore
Drilling, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K
filed October 26, 2007). |
|||
4.1 | Indenture, dated as of February 4, 1997, between Diamond Offshore Drilling, Inc. and The Bank
of New York Mellon (formerly known as The Bank of New York) (as successor under the Base
Indenture to The Chase Manhattan Bank), as Trustee (incorporated by reference to Exhibit 4.1
to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001) (SEC File No.
1-13926). |
|||
4.2 | Seventh Supplemental Indenture, dated as of October 8, 2009, between Diamond Offsore
Drilling, Inc. and The Bank of New York Mellon, as Trustee (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K filed October 8, 2009. |
|||
31.1* | Rule 13a-14(a) Certification of the Chief Executive Officer. |
|||
31.2* | Rule 13a-14(a) Certification of the Chief Financial Officer. |
|||
32.1* | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
|||
101.INS** | XBRL Instance Document. |
|||
101.SCH** | XBRL Taxonomy Extension Schema Document. |
|||
101.CAL** | XBRL Taxonomy Calculation Linkbase Document |
|||
101.LAB** | XBRL Label Linkbase Document. |
|||
101.PRE** | XBRL Presentation Linkbase Document. |
|||
101.DEF** | XBRL Taxonomy Extension Definition. |
* | Filed or furnished herewith. | |
** | The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act, and otherwise, not subject to liability under these sections. |
49