Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
Form
10-Q
x
|
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
|
Commission
file number: 1-13289
________________
Pride
International, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
76-0069030
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
5847
San Felipe, Suite 3300
Houston,
Texas
|
77057
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(713)
789-1400
(Registrant’s
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 x 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES x 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 x
|
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 Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practical date.
Outstanding
as of
October
27, 2009
|
|
Common
Stock, par value $.01 per share
|
174,515,635
|
Table
of Contents
Page
|
|
2
Pride
International, Inc.
(In
millions, except par value)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(As
Adjusted)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 957.5 | $ | 712.5 | ||||
Trade
receivables, net
|
328.8 | 438.8 | ||||||
Deferred
income taxes
|
14.9 | 90.5 | ||||||
Prepaid
expenses and other current assets
|
118.1 | 177.4 | ||||||
Assets
held for sale
|
- | 1.4 | ||||||
Total
current assets
|
1,419.3 | 1,420.6 | ||||||
PROPERTY
AND EQUIPMENT
|
5,815.5 | 6,067.8 | ||||||
Less:
accumulated depreciation
|
1,163.1 | 1,474.9 | ||||||
Property
and equipment, net
|
4,652.4 | 4,592.9 | ||||||
INTANGIBLE
AND OTHER ASSETS
|
83.2 | 55.5 | ||||||
Total
assets
|
$ | 6,154.9 | $ | 6,069.0 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
portion of long-term debt
|
$ | 30.3 | $ | 30.3 | ||||
Accounts
payable
|
125.5 | 137.3 | ||||||
Accrued
expenses and other current liabilities
|
353.8 | 403.4 | ||||||
Total
current liabilities
|
509.6 | 571.0 | ||||||
OTHER
LONG-TERM LIABILITIES
|
120.3 | 146.2 | ||||||
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
1,169.4 | 692.9 | ||||||
DEFERRED
INCOME TAXES
|
85.3 | 258.9 | ||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Preferred
stock, $0.01 par value; 50.0 shares authorized; none
issued
|
- | - | ||||||
Common
stock, $0.01 par value; 400.0 shares authorized; 174.9 and 173.8 shares
issued; 174.0 and 173.1 shares outstanding
|
1.7 | 1.7 | ||||||
Paid-in
capital
|
2,038.2 | 2,002.6 | ||||||
Treasury
stock, at cost; 0.9 and 0.7 shares
|
(16.3 | ) | (13.3 | ) | ||||
Retained
earnings
|
2,243.6 | 2,408.2 | ||||||
Accumulated
other comprehensive income
|
3.1 | 0.8 | ||||||
Total stockholders’ equity
|
4,270.3 | 4,400.0 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 6,154.9 | $ | 6,069.0 |
The
accompanying notes are an integral part of the consolidated financial
statements.
3
Pride
International, Inc.
(Unaudited)
(In
millions, except per share amounts)
Three
Months Ended
|
||||||||
September
30,
|
||||||||
|
2009
|
2008
|
||||||
(As
Adjusted)
|
||||||||
REVENUES
|
||||||||
Revenues
excluding reimbursable revenues
|
$ | 379.5 | $ | 455.5 | ||||
Reimbursable
revenues
|
6.6 | 7.8 | ||||||
386.1 | 463.3 | |||||||
COSTS
AND EXPENSES
|
||||||||
Operating
costs, excluding depreciation and amortization
|
210.6 | 206.4 | ||||||
Reimbursable
costs
|
5.8 | 7.4 | ||||||
Depreciation
and amortization
|
39.5 | 38.0 | ||||||
General
and administrative, excluding depreciation and
amortization
|
30.2 | 26.5 | ||||||
Gain
on sales of assets, net
|
(0.1 | ) | - | |||||
286.0 | 278.3 | |||||||
EARNINGS
FROM OPERATIONS
|
100.1 | 185.0 | ||||||
OTHER
INCOME (EXPENSE), NET
|
||||||||
Interest
expense, net of amounts capitalized
|
- | (2.1 | ) | |||||
Interest
income
|
0.6 | 2.9 | ||||||
Other
income (expense), net
|
(2.7 | ) | 6.1 | |||||
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
98.0 | 191.9 | ||||||
INCOME
TAXES
|
(18.1 | ) | (47.7 | ) | ||||
INCOME
FROM CONTINUING OPERATIONS, NET OF TAX
|
79.9 | 144.2 | ||||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
|
(44.3 | ) | 44.9 | |||||
NET
INCOME
|
$ | 35.6 | $ | 189.1 | ||||
BASIC
EARNINGS PER SHARE:
|
||||||||
Income
from continuing operations
|
$ | 0.45 | $ | 0.82 | ||||
Income
(loss) from discontinued operations
|
(0.26 | ) | 0.26 | |||||
Net
income
|
$ | 0.19 | $ | 1.08 | ||||
DILUTED
EARNINGS PER SHARE:
|
||||||||
Income
from continuing operations
|
$ | 0.45 | $ | 0.82 | ||||
Income
(loss) from discontinued operations
|
(0.25 | ) | 0.26 | |||||
Net
income
|
$ | 0.20 | $ | 1.08 | ||||
SHARES
USED IN PER SHARE CALCULATIONS
|
||||||||
Basic
|
173.5 | 172.7 | ||||||
Diluted
|
174.0 | 173.3 |
The
accompanying notes are an integral part of the consolidated financial
statements.
4
Pride
International, Inc.
(Unaudited)
(In
millions, except per share amounts)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
|
2009
|
2008
|
||||||
(As
Adjusted)
|
||||||||
REVENUES
|
||||||||
Revenues
excluding reimbursable revenues
|
$ | 1,253.0 | $ | 1,181.4 | ||||
Reimbursable
revenues
|
24.4 | 31.0 | ||||||
1,277.4 | 1,212.4 | |||||||
COSTS
AND EXPENSES
|
||||||||
Operating
costs, excluding depreciation and amortization
|
615.9 | 565.7 | ||||||
Reimbursable
costs
|
21.6 | 29.8 | ||||||
Depreciation
and amortization
|
118.3 | 109.7 | ||||||
General
and administrative, excluding depreciation and
amortization
|
85.3 | 95.5 | ||||||
Loss
(gain) on sales of assets, net
|
(0.5 | ) | 0.5 | |||||
840.6 | 801.2 | |||||||
EARNINGS
FROM OPERATIONS
|
436.8 | 411.2 | ||||||
OTHER
INCOME (EXPENSE), NET
|
||||||||
Interest
expense, net of amounts capitalized
|
(0.1 | ) | (19.9 | ) | ||||
Refinancing
charges
|
- | (1.2 | ) | |||||
Interest
income
|
2.6 | 15.1 | ||||||
Other
income (expense), net
|
(3.3 | ) | 15.7 | |||||
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
436.0 | 420.9 | ||||||
INCOME
TAXES
|
(72.5 | ) | (84.6 | ) | ||||
INCOME
FROM CONTINUING OPERATIONS, NET OF TAX
|
363.5 | 336.3 | ||||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
|
(44.9 | ) | 280.1 | |||||
NET
INCOME
|
$ | 318.6 | $ | 616.4 | ||||
BASIC
EARNINGS PER SHARE:
|
||||||||
Income
from continuing operations
|
$ | 2.06 | $ | 1.96 | ||||
Income
(loss) from discontinued operations
|
(0.26 | ) | 1.63 | |||||
Net
income
|
$ | 1.80 | $ | 3.59 | ||||
DILUTED
EARNINGS PER SHARE:
|
||||||||
Income
from continuing operations
|
$ | 2.06 | $ | 1.89 | ||||
Income
(loss) from discontinued operations
|
(0.26 | ) | 1.58 | |||||
Net
income
|
$ | 1.80 | $ | 3.47 | ||||
SHARES
USED IN PER SHARE CALCULATIONS
|
||||||||
Basic
|
173.4 | 169.9 | ||||||
Diluted
|
173.7 | 176.0 |
The
accompanying notes are an integral part of the consolidated financial
statements.
5
Pride
International, Inc.
(Unaudited)
(In
millions)
Accumulated
|
||||||||||||||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Treasury
Stock
|
Retained
|
Comprehensive
|
Stockholders’
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Earnings
|
Income
(Loss)
|
Equity
|
|||||||||||||||||||||||||
Balance,
December 31, 2008
|
173.8 | $ | 1.7 | $ | 2,002.6 | 0.7 | $ | (13.3 | ) | $ | 2,408.2 | $ | 0.8 | $ | 4,400.0 | |||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||||||
Net
income
|
318.6 | 318.6 | ||||||||||||||||||||||||||||||
Foreign
currency translation
|
2.2 | 2.2 | ||||||||||||||||||||||||||||||
Foreign
currency hedges, net of tax
|
0.1 | 0.1 | ||||||||||||||||||||||||||||||
SFAS
No. 158 change in funded status
|
- | |||||||||||||||||||||||||||||||
Total
comprehensive income
|
318.6 | 2.3 | 320.9 | |||||||||||||||||||||||||||||
Exercise
of stock options
|
0.2 | 4.2 | 4.2 | |||||||||||||||||||||||||||||
Tax
deficiency from stock-based compensation
|
(1.1 | ) | (1.1 | ) | ||||||||||||||||||||||||||||
Stock-based
compensation, net
|
0.9 | 32.5 | 0.2 | (3.0 | ) | 29.5 | ||||||||||||||||||||||||||
Spin-off
of Seahawk
|
(483.2 | ) | (483.2 | ) | ||||||||||||||||||||||||||||
Balance,
September 30, 2009
|
174.9 | $ | 1.7 | $ | 2,038.2 | 0.9 | $ | (16.3 | ) | $ | 2,243.6 | $ | 3.1 | $ | 4,270.3 |
The
accompanying notes are an integral part of the consolidated financial
statements.
6
Pride
International, Inc.
(Unaudited)
(In
millions)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM (USED IN) OPERATING ACTIVITIES:
|
(As
Adjusted)
|
|||||||
Net
income
|
$ | 318.6 | $ | 616.4 | ||||
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
Gain
on sale of Eastern Hemisphere land rigs
|
(5.4 | ) | - | |||||
Gain
on sale of tender-assist rigs
|
- | (112.7 | ) | |||||
Gain
on sale of Latin America and E&P Services segments
|
- | (33.6 | ) | |||||
Gain
on sale of equity method investment
|
- | (11.4 | ) | |||||
Depreciation
and amortization
|
155.8 | 159.3 | ||||||
Amortization
and write-offs of deferred financing costs
|
1.6 | 3.5 | ||||||
Amortization
of deferred contract liabilities
|
(40.3 | ) | (45.6 | ) | ||||
Impairment
charges
|
33.4 | - | ||||||
Gain
on sales of assets, net
|
(0.5 | ) | (20.8 | ) | ||||
Deferred
income taxes
|
(23.9 | ) | 56.2 | |||||
Excess
tax benefits from stock-based compensation
|
(1.0 | ) | (6.6 | ) | ||||
Stock-based
compensation
|
28.8 | 17.8 | ||||||
Other,
net
|
0.6 | 2.0 | ||||||
Net
effect of changes in operating accounts (See Note 11)
|
59.3 | (178.3 | ) | |||||
Change
in deferred gain on asset sales and retirements
|
4.9 | (12.6 | ) | |||||
Increase
(decrease) in deferred revenue
|
0.6 | (4.2 | ) | |||||
Decrease
(increase) in deferred expense
|
(0.4 | ) | 3.0 | |||||
NET
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
532.1 | 432.4 | ||||||
CASH
FLOWS FROM (USED IN) INVESTING ACTIVITIES:
|
||||||||
Purchases
of property and equipment
|
(698.6 | ) | (752.8 | ) | ||||
Reduction
of cash from spin-off of Seahawk
|
(82.4 | ) | - | |||||
Proceeds
from dispositions of property and equipment
|
7.3 | 0.9 | ||||||
Proceeds
from the sale of Eastern Hemisphere land rigs, net
|
9.6 | - | ||||||
Proceeds
from sale of tender-assist rigs, net
|
- | 210.8 | ||||||
Proceeds
from sale of platform rigs, net
|
- | 64.5 | ||||||
Proceeds
from sale of equity method investment
|
- | 15.0 | ||||||
NET
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
(764.1 | ) | (461.6 | ) | ||||
CASH
FLOWS FROM (USED IN) FINANCING ACTIVITIES:
|
||||||||
Repayments
of borrowings
|
(22.3 | ) | (529.1 | ) | ||||
Proceeds
from debt borrowings
|
498.2 | 68.0 | ||||||
Debt
finance costs
|
(6.2 | ) | - | |||||
Net
proceeds from employee stock transactions
|
6.3 | 21.2 | ||||||
Excess
tax benefits from stock-based compensation
|
1.0 | 6.6 | ||||||
NET
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
477.0 | (433.3 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
245.0 | (462.5 | ) | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
712.5 | 890.4 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 957.5 | $ | 427.9 |
The
accompanying notes are an integral part of the consolidated financial
statements.
7
Pride
International, Inc.
NOTE
1. GENERAL
Nature
of Operations
Pride
International, Inc. (“Pride,” “we,” “our,” or “us”) is a leading international
provider of offshore contract drilling services. We provide these services to
oil and natural gas exploration and production companies through the operation
and management of 23 offshore rigs. We also have four ultra-deepwater drillships
under construction.
Basis
of Presentation
On August
24, 2009, we completed the spin-off of our 20-rig mat-supported jackup business.
In the third quarter of 2008, we entered into agreements to sell our Eastern
Hemisphere land rig operations and completed the sale of all but one land rig
used in those operations in the fourth quarter of 2008. The sale of the
remaining land rig closed in the second quarter of 2009. The results
of operations, for all periods presented, of the assets disposed of in these
transactions have been reclassified to income from discontinued operations.
Except where noted, the discussions in the following notes relate to our
continuing operations only (see Note 2).
Our
unaudited consolidated financial statements included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. We believe that the presentation
and disclosures herein are adequate to make the information not misleading. In
the opinion of management, the unaudited consolidated financial information
included herein reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial position,
results of operations and cash flows for the interim periods presented. These
unaudited consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and notes thereto included in our
annual report on Form 10-K for the year ended December 31, 2008. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for a full year or any other interim
period.
In the
notes to the unaudited consolidated financial statements, all dollar and share
amounts, other than per share amounts, in tabulations are in millions of dollars
and shares, respectively, unless otherwise noted.
Subsequent
Events
In
preparing these financial statements, we have evaluated subsequent events
through November 2, 2009, which is the date the financial statements are
being issued.
Management
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property
and Equipment
Property
and equipment comprise a significant amount of our total assets. We determine
the carrying value of these assets based on property and equipment policies that
incorporate our estimates, assumptions and judgments relative to the carrying
value, remaining useful lives and salvage value of our rigs and other
assets.
We
evaluate our property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of such assets or asset groups may not
be recoverable. Asset impairment evaluations are, by nature, highly subjective.
They involve expectations about future cash flows generated by our assets, and
reflect management’s assumptions and judgments regarding future industry
conditions and their effect on future utilization levels, dayrates and costs.
The use of different estimates and assumptions could result in materially
different carrying values of our assets and could materially affect our results
of operations.
8
Fair
Value Accounting
We use
fair value measurements to record fair value adjustments to certain financial
and nonfinancial assets and liabilities and to determine fair value disclosures.
Our foreign currency forward contracts are recorded at fair value on a recurring
basis. See Note 5 – Derivatives and Financial Instruments.
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Depending on the nature of the asset or liability, we use
various valuation techniques and assumptions when estimating fair value. For
accounting disclosure purposes, a three-level valuation hierarchy of fair value
measurements has been established. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability as of the
measurement date.
When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded or disclosed at fair value, we consider the principal
or most advantageous market in which we would transact and consider assumptions
that market participants would use when pricing the asset or liability. When
possible, we look to active and observable markets to price identical assets or
liabilities. When identical assets and liabilities are not traded in active
markets, we look to market observable data for similar assets and liabilities.
Nevertheless, certain assets and liabilities are not actively traded in
observable markets, and we are required to use alternative valuation techniques
to derive an estimated fair value measurement. We adopted new guidance on
January 1 and April 1, 2009 with no material impact on our consolidated
financial statements.
Accounting
Pronouncements
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Subtopic 810-10-65, Transition
Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests
inConsolidated
Financial Statements) establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. In addition, ASC Subtopic 810-10-65
requires expanded disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the parent’s owners
and the interests of the noncontrolling owners of a subsidiary. This subtopic is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We adopted the provisions of ASC
Subtopic 810-10-65 on January 1, 2009, with no material impact on our
consolidated financial statements.
ASC Topic
805, Business
Combinations (formerly SFAS No. 141 (Revised 2007), Business Combinations, and
FASB Staff Position (“FSP”) SFAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies), provides that all business combinations are required to
be accounted for at fair value under the acquisition method of accounting, but
changes the method of applying the acquisition method from previous principles
in a number of ways. Acquisition costs are no longer considered part
of the fair value of an acquisition and will generally be expensed as incurred,
noncontrolling interests are valued at fair value at the acquisition date,
in-process research and development is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, restructuring costs
associated with a business combination are generally expensed subsequent to the
acquisition date, and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. Contingent assets acquired and liabilities assumed in a
business combination are to be recognized at fair value if fair value can be
reasonably estimated during the measurement period. We adopted the changes
to the provisions of ASC Topic 805 on January 1, 2009, with no material impact
on our consolidated financial statements.
ASC
Subtopic 820-10-65, Transition
Related to FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, provides additional guidance for
estimating fair value in accordance with ASC 820, Fair Value Measurements and
Disclosures, when the volume and level of activity for the asset or
liability have significantly decreased. This subtopic re-emphasizes
that regardless of market conditions the fair value measurement is an exit price
concept as defined in ASC 820. This subtopic clarifies and includes
additional factors to consider in determining whether there has been a
significant decrease in market activity for an asset or liability and provides
additional clarification on estimating fair value when the market activity for
an asset or liability has declined significantly. The scope of this
subtopic does not include assets and liabilities measured under quoted prices in
active markets. ASC Subtopic 820-10-65 is applied prospectively to
all fair value measurements where appropriate and will be effective for interim
and annual periods ending after June 15, 2009. We adopted the
provisions of ASC Subtopic 820-10-65 effective April 1, 2009, with no material
impact on our consolidated financial statements.
9
ASC Topic
825-10-65, Transition Related
to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments amends ASC Topic 825, Financial Instruments, to
require publicly-traded companies, as defined in ASC Topic 270, Interim
Reporting, to provide disclosures on the fair value of financial instruments in
interim financial statements. ASC Topic 825-10-65 is effective for
interim periods ending after June 15, 2009. We adopted the new
disclosure requirements in our second quarter 2009 financial statements with no
material impact on our consolidated financial statements.
ASC
Subtopic 320-10-65, Transition
Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (formerly FSP SFAS 115-2 and SFAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments issued in April 2009), provides
transitional guidance for debt securities to make previous guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. Existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities was not amended by this
subtopic. This subtopic is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. We adopted the provisions of this subtopic effective April 1,
2009, with no material impact on our consolidated financial
statements.
ASC Topic
855, Subsequent Events
(formerly SFAS No. 165, Subsequent Events issued May
2009) establishes (i) the period after the balance sheet date during which
management shall evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (ii) the circumstances
under which an entity shall recognize events or transactions occurring after the
balance sheet date in its financial statements; and (iii) the disclosures that
an entity shall make about events or transactions that occurred after the
balance sheet date. This topic is effective for interim or annual financial
periods ending after June 15, 2009, and shall be applied prospectively. We
adopted the provisions of this topic effective April 1, 2009, with no material
impact on our consolidated financial statements.
ASC Topic 860, Transfers and Servicing (formerly SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125, as amended by SFAS No. 166, Accounting for Transfers of Financial Assets – An Amendment of FASB Statement No. 140, issued in June 2009) amends prior principles to require more disclosure about transfers of financial assets and the continuing exposure, retained by the transferor, to the risks related to transferred financial assets, including securitization transactions. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. It also enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. This topic will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. We will adopt the provisions of this topic effective January 1, 2010 and we do not expect the adoption to have a material impact on our consolidated financial statements.
ASC
Subtopic 810-10-05, Consolidation – Variable Interest
Entities (formerly FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable
Interest Entities, as amended by SFAS No.
167, Amendments to FASB
Interpretation No. 46(R) in June 2009), defines how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. This topic
requires a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity’s financial statements. This statement will be
effective at the start of a reporting entity’s first fiscal year beginning after
November 15, 2009. Early application is not permitted. We will adopt the
provisions of this subtopic prospectively effective January 1, 2010 and we do
not expect the adoption to have a material impact on our consolidated financial
statements.
ASC Topic
105, Generally Accepted
Accounting Principles (formerly SFAS No. 168, The FASB Accounting Standards
Codification and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162), issued in June 2009, became the source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date of this
statement, the codification superseded all then-existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature
not included in the codification became nonauthoritative. This statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We adopted the provisions of this topic in the
third quarter of 2009, with no change to our consolidated financial statements
other than changes in reference to various authoritative accounting
pronouncements in our consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Fair Value Measurements and
Disclosures – Measuring Liabilities and Fair Value, amending Subtopic
820-10, Fair Value
Measurement, to provide guidance on the manner in which the fair value of
liabilities should be determined. This update provides clarification that, in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of defined valuation techniques. The amendments in this update
also clarify that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents
the transfer of the liability. We will adopt ASU No. 2009-05 in the fourth
quarter of 2009, and we do not expect it will have a material impact on our
consolidated financial statements.
10
Reclassifications
Certain
reclassifications have been made to the prior year’s consolidated financial
statements to conform with the current year presentation.
NOTE
2. DISCONTINUED OPERATIONS AND OTHER DIVESTITURES
Discontinued
Operations
We report
discontinued operations in accordance with the guidance of ASC Topic 205, Presentation of Financial
Statements, and Topic 360, Property, Plant and
Equipment. We reclassify, from continuing operations to discontinued
operations, for all periods presented, the results of operations for any asset
group either held for sale or disposed of. We define an asset group as an
operating group. Such reclassifications had no effect on our net income or
stockholders’ equity.
Spin-off
of Mat-Supported Jackup Business
On August
24, 2009, we completed the spin-off of Seahawk Drilling, Inc. (“Seahawk”), which
holds the assets and liabilities that were associated with our mat-supported
jackup rig business. In the spin-off, our stockholders received 100%
(approximately 11.6 million shares) of the outstanding common stock of Seahawk
by way of a pro rata stock dividend. Each of our stockholders of
record at the close of business on August 14, 2009 received one share of Seahawk
common stock for every 15 shares of our common stock held by such stockholder
and cash in lieu of any fractional shares of Seahawk common stock to which such
stockholder otherwise would have been entitled.
The
following table presents selected information regarding the results of
operations of our former mat-supported jackup business:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | 30.8 | $ | 143.9 | $ | 189.4 | $ | 476.4 | ||||||||
Operating
costs, excluding depreciation and amortization
|
30.7 | 77.4 | 161.6 | 247.7 | ||||||||||||
Depreciation
and amortization
|
8.4 | 14.2 | 37.5 | 45.3 | ||||||||||||
General
and administrative, excluding depreciation and
amortization
|
17.7 | 1.1 | 28.4 | 2.2 | ||||||||||||
Impairment
expense
|
33.4 | - | 33.4 | - | ||||||||||||
Gain
on sales of assets, net
|
- | (3.0 | ) | (5.0 | ) | (21.3 | ) | |||||||||
Earnings
(loss) from operations
|
$ | (59.4 | ) | $ | 54.2 | $ | (66.5 | ) | $ | 202.5 | ||||||
Other
income (expense), net
|
(0.1 | ) | (0.5 | ) | 1.2 | 0.2 | ||||||||||
Income
(loss) before taxes
|
(59.5 | ) | 53.7 | (65.3 | ) | 202.7 | ||||||||||
Income
taxes
|
17.5 | (18.3 | ) | 18.0 | (71.0 | ) | ||||||||||
Income
(loss) from discontinued operations
|
$ | (42.0 | ) | $ | 35.4 | $ | (47.3 | ) | $ | 131.7 |
In
connection with the spin-off, we made a cash contribution to Seahawk of
approximately $47.3 million to achieve a targeted working capital for Seahawk as
of May 31, 2009 of $85 million. We and Seahawk also agreed to
indemnify each other for certain liabilities that may arise or be incurred in
the future attributable to our respective businesses.
As of the
date of the spin-off, per ASC Topic 360, we conducted a fair value assessment of
the long-lived assets of Seahawk to determine whether an impairment loss should
be recognized. We used multiple valuation methods and weighted the results of
those methods for the final fair value determination. For the first valuation
technique, we applied the income approach using a discounted cash flows
methodology. Our valuation was based upon unobservable inputs that required us
to make assumptions about the future performance of the mat-supported jackup
rigs for which there is little or no market data, including projected demand,
dayrates and operating costs. We also used a recent third-party valuation and
recent analyst research reports for our second and third valuation methods. As a
result of our fair value assessment, we determined that the carrying value of
the Seahawk long-lived assets exceeded their fair value, resulting in an
impairment loss of $33.4 million. We recorded the loss in income from
discontinued operations for the three and nine months ended September 30,
2009.
11
Sale
of Eastern Hemisphere Land Rigs
In the
third quarter of 2008, we entered into agreements to sell our remaining seven
land rigs for $95 million in cash. The sale of all but one rig closed in the
fourth quarter of 2008. We leased the remaining rig to the buyer until the sale
of that rig closed, which occurred in the second quarter of 2009. We
recognized an after-tax gain of $5.2 million upon closing the sale of the last
rig. Accordingly, this gain, the recognition of which had been
previously deferred, was reflected in our income from discontinued operations
for the nine months ended September 30, 2009. The following table
presents selected information regarding the results of operations of this
operating group:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | - | $ | 16.4 | $ | 6.7 | $ | 52.5 | ||||||||
Income
(loss) before taxes
|
(0.4 | ) | 2.6 | (0.8 | ) | 6.2 | ||||||||||
Income
taxes
|
(1.1 | ) | (2.2 | ) | (1.8 | ) | (7.6 | ) | ||||||||
Gain
on disposal of assets, net of tax
|
- | - | 5.4 | - | ||||||||||||
Income
(loss) from discontinued operations
|
$ | (1.5 | ) | $ | 0.4 | $ | 2.8 | $ | (1.4 | ) |
Other
Divestitures
In
February 2008, we completed the sale of our fleet of three self-erecting,
tender-assist rigs for $213 million in cash. We operated one of the rigs until
mid-April 2009, when we transitioned the operations of that rig to the
owner.
During
the third quarter of 2007, we completed the disposition of our Latin America
Land and E&P Services segments for $1.0 billion in cash. The purchase price
was subject to certain post-closing adjustments for various
indemnities. From the closing date of the sale through September 30,
2009, we recorded a total gain on disposal of $325.4 million, which included
certain estimates for the settlement of closing date working capital, valuation
adjustments for tax and other indemnities provided to the buyer and selling
costs incurred by us. We have indemnified the buyer for certain obligations that
may arise or be incurred in the future by the buyer with respect to the
business. We believe it is probable that some of these liabilities will be
settled with the buyer in cash. Our total estimated gain on disposal of assets
includes a $29.7 million liability based on our fair value estimates for the
indemnities. In December 2008, the final amount of working capital payable by
the buyer to us was determined in accordance with the purchase agreement to be
approximately $44.5 million, plus approximately $5.8 million of accrued interest
to September 30, 2009. To date, the buyer has not made the required payment, and
we have received no assurance that payment will be made. The buyer has made
various tax and other indemnification claims totaling approximately $39.9
million, as compared to our recorded liabilities related to these claims of
$30.5 million. We continue to pursue collection of the amounts due to us and
resolution of the tax and indemnification claims with the buyer. The expected
settlement dates for the remaining tax indemnities vary from within one year to
several years. Our final gain may be materially affected by the final resolution
of these matters.
The
following table presents selected information regarding the results of
operations of these other divestitures:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | (0.4 | ) | $ | 19.4 | $ | 15.1 | $ | 74.7 | |||||||
Income
(loss) before taxes
|
(0.6 | ) | 2.3 | 1.0 | 5.0 | |||||||||||
Income
taxes
|
- | (0.5 | ) | - | (1.5 | ) | ||||||||||
Gain
(loss) on disposal of assets, net of tax
|
(0.2 | ) | 7.3 | (1.4 | ) | 146.3 | ||||||||||
Income
(loss) from discontinued operations
|
$ | (0.8 | ) | $ | 9.1 | $ | (0.4 | ) | $ | 149.8 |
12
NOTE
3. PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(As
Adjusted)
|
||||||||
Rigs
and rig equipment
|
$ | 3,999.9 | $ | 4,873.6 | ||||
Construction-in-progress
- newbuild drillships
|
1,484.3 | 965.5 | ||||||
Construction-in-progress
- other
|
248.4 | 165.7 | ||||||
Other
|
82.9 | 63.0 | ||||||
Property
and equipment, cost
|
5,815.5 | 6,067.8 | ||||||
Accumulated
depreciation and amortization
|
(1,163.1 | ) | (1,474.9 | ) | ||||
Property
and equipment, net
|
$ | 4,652.4 | $ | 4,592.9 |
NOTE
4. DEBT
Debt
consisted of the following:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Senior
unsecured revolving credit facility
|
$ | - | $ | - | ||||
8
1/2% Senior Notes due 2019, net of unamortized discount of $1.8
million
|
498.2 | - | ||||||
7
3/8% Senior Notes due 2014, net of unamortized discount of
$1.5 million and $1.7 million, respectively
|
498.5 | 498.3 | ||||||
MARAD
notes, net of unamortized fair value discount of $2.0 million and $2.4
million, respectively
|
203.0 | 224.9 | ||||||
Total
debt
|
1,199.7 | 723.2 | ||||||
Less:
current portion of long-term debt
|
30.3 | 30.3 | ||||||
Long-term
debt
|
$ | 1,169.4 | $ | 692.9 |
In July
2009, borrowing availability under our unsecured revolving credit facility was
increased from $300.0 million to $320.0 million. Amounts drawn under the senior
unsecured revolving credit facility bear interest at variable rates based on
LIBOR plus a margin or the alternative base rate defined in the agreement. The
interest rate margin applicable to LIBOR advances varies based on our credit
rating. As of September 30, 2009, there were no borrowings or letters of credit
outstanding under the facility and availability was $320.0 million.
On June
2, 2009, we completed an offering of $500.0 million aggregate principal amount
of 8 1/2% Senior Notes due 2019. The 2019 notes bear interest at 8.5% per
annum, payable semiannually. We expect to use the proceeds from this offering,
net of discount and issuance costs, of $492.4 million for general corporate
purposes. The 2019 notes contain provisions that limit our ability and the
ability of our subsidiaries, with certain exceptions, to engage in sale and
leaseback transactions, create liens and consolidate, merge or transfer all or
substantially all of our assets. If we are required to make an offer to
repurchase our 7 3/8% Senior Notes due 2014 as a result of specified change in
control events that result in a ratings decline, we will be required to make a
concurrent offer to purchase the 2019 notes. The 2019 notes are subject to
redemption, in whole or in part, at our option at any time at a redemption price
equal to the principal amount of the notes redeemed plus a make-whole
premium. We will also pay accrued but unpaid interest to the
redemption date.
ASC
Subtopic 470-20, Debt with
Conversion and Other Options (formerly FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)), applies to any convertible debt instrument that may be
wholly or partially settled in cash and requires the separation of the debt and
equity components of cash-settleable convertibles at the date of
issuance. The accounting under ASC Subtopic 470-20, which we adopted
January 1, 2009, required retrospective application for all periods presented
and therefore must be applied to our $300 million 3.25% convertible senior notes
due 2033, which were issued in May 2003 and retired in May 2008. We
have calculated a theoretical non-cash interest expense based on a similar debt
instrument carrying a fixed interest rate but excluding the equity conversion
feature and measured at fair value at the time the notes were issued. As a
result, under ASC Subtopic 470-20, the debt component determined for these notes
was $251.8 million and the debt discount was $48.2 million. The
equity component, recorded as additional paid-in capital, was $31.3 million,
which represents the difference between the proceeds from the issuance of the
notes and the fair value of the liability, net of a deferred tax benefit of
$16.9 million. The fixed interest rate was then applied to
13
the debt component of the notes in the form of an original issuance
discount and amortized over the life of the notes as a non-cash interest charge.
This resulted in a non-cash increase of our historical interest expense, net of
amounts capitalized, of $1.5 million, $9.2 million and $9.9 million for 2008,
2007 and 2006, respectively. Additionally, in accordance with ASC Subtopic
835-20, Capitalization of
Interest Cost, we capitalized approximately $4.0 million of the
incremental interest expense associated with the amortization of the debt
discount. Application of these changes to our consolidated income statement for
the nine months ended September 30, 2008 resulted in the following differences
when compared to amounts previously reported:
|
Nine
Months Ended
|
|||
September
30,
|
||||
2008
|
||||
Additional
pre-tax non-cash interest expense
|
$ | 1.5 | ||
Additional
deferred tax benefit
|
(0.5 | ) | ||
Retroactive
change in net income and retained earnings
|
$ | 1.0 | ||
Change
to basic earnings per share
|
$ | - | ||
Change
to diluted earnings per share
|
$ | - |
An
adjustment to reduce the prior period’s retained earnings in the amount of $28.8
million was recorded for the year ended December 31, 2008, reflecting the
cumulative impact of the adoption of ASC Subtopic 470-20 on our financial
statements. The amortization of the debt discount required under ASC
Subtopic 470-20 is a non-cash expense and has no impact on total operating,
investing and financing cash flows in the prior period or future consolidated
statements of cash flows.
NOTE
5. DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair
Value of Financial Instruments
Our
financial instruments include cash and cash equivalents, accounts receivable,
accounts payable, foreign currency forward contracts and debt. The estimated
fair value of our debt at September 30, 2009 and December 31, 2008 was $1,285.3
million and $702.5 million, respectively, which differs from the carrying
amounts of $1,199.7 million and $723.2 million, respectively, included in our
consolidated balance sheets. The fair value of our debt has been estimated based
on quarter- and year-end quoted market prices.
The
following table presents the carrying amount and estimated fair value of our
financial instruments recognized at fair value on a recurring
basis:
September
30, 2009
|
December
31, 2008
|
|||||||||||||||||||||||
Estimated
Fair Value Measurements
|
||||||||||||||||||||||||
Carrying
Amount
|
Quoted
Prices in Active Markets
(Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Carrying Amount
|
Estimated
Fair Value
|
|||||||||||||||||||
Derivative
Financial Instruments:
|
||||||||||||||||||||||||
Foreign
currency forward contracts
|
$ | 0.2 | $ | - | $ | 0.2 | $ | - | $ | 0.2 | $ | 0.2 |
The
foreign currency forward contracts have been valued using a combined income and
market-based valuation methodology based on forward exchange curves and credit.
These curves are obtained from independent pricing services reflecting broker
market quotes. Our cash and cash equivalents, accounts receivable and accounts
payable are by their nature short-term. As a result, the carrying value included
in the accompanying consolidated balance sheets approximate fair
value.
Cash
Flow Hedging
We have a
foreign currency hedging program to moderate the change in value of forecasted
payroll transactions and related costs denominated in Euros. We are hedging a
portion of these payroll and related costs using forward contracts. When the
U.S. dollar strengthens against the Euro, the decline in the value of the
forward contracts is offset by lower future payroll costs. Conversely, when the
U.S. dollar weakens, the increase in value of forward contracts offsets higher
future payroll costs. The maximum amount of time that we are hedging our
exposure to Euro-denominated forecasted payroll costs is six months. The
aggregate notional amount of these forward contracts, expressed in U.S. dollars,
was $6.1 million at September 30, 2009.
14
All of
our foreign currency forward contracts were accounted for as cash flow hedges
under ASC Topic 815, Derivatives and Hedging
(formerly SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities). The fair market value of these
derivative instruments is included in prepaid expenses and other current assets
or accrued expenses and other current liabilities, with the cumulative
unrealized gain or loss included in accumulated other comprehensive income in
our consolidated balance sheet. The estimated fair market value of our
outstanding foreign currency forward contracts resulted in an asset of
approximately $0.2 million at September 30, 2009. Hedge effectiveness is
measured quarterly based on the relative cumulative changes in fair value
between derivative contracts and the hedged item over time. Any change in fair
value resulting from ineffectiveness is recognized immediately in earnings and
recorded to other income (expense). We did not recognize a gain or loss due to
hedge ineffectiveness in our consolidated statements of operations for the nine
months ended September 30, 2009 related to these derivative
instruments.
The
balance of the net unrealized gain related to our foreign currency forward
contracts in accumulated other comprehensive income is as follows:
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Net
unrealized gain at beginning of period
|
$ | 0.2 | $ | - | ||||
Activity
during period:
|
||||||||
Settlement
of forward contracts outstanding at beginning of period
|
(0.2 | ) | - | |||||
Net
unrealized gain (loss) on outstanding foreign currency forward
contracts
|
0.2 | (0.2 | ) | |||||
Net
unrealized gain (loss) at end of period
|
$ | 0.2 | $ | (0.2 | ) |
NOTE
6. INCOME TAXES
In
accordance with generally accepted accounting principles, we estimate the
full-year tax rate from continuing operations and apply this rate to our
year-to-date income from continuing operations. In addition, we separately
calculate the tax impact of unusual items, if any. For the three
months ended September 30, 2009 and September 30, 2008, our consolidated
effective tax rate for continuing operations was 18.5% and 24.9%, respectively.
For the nine months ended September 30, 2009 and September 30, 2008 our
consolidated effective tax rate for continuing operations was 16.6% and 20.1%,
respectively. The lower tax rate for the 2009 period was principally the result
of increased profitability in lower tax jurisdictions and tax benefits related
to the finalization of certain tax returns.
NOTE
7. EARNINGS PER SHARE
ASC Topic
260, Earnings per
Share, clarifies that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities and should be included in the
computation of earnings per share under the “two class” method described in ASC
Subtopic 260-10-45. The “two class” method allocates undistributed earnings
between common shares and participating securities. We have determined that
our grants of unvested restricted stock awards are considered participating
securities. We have prepared our current period earnings per share calculations
and retrospectively revised our prior period calculations to exclude net
income allocated to these unvested restricted stock awards. As a result, basic
and diluted income from continuing operations per share decreased by $0.01 for
the three months ended September 30, 2008 and $0.03 for the nine months ended
September 30, 2008.
15
The
following table is a reconciliation of the numerator and the denominator of our
basic and diluted earnings per share from continuing operations:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Income
from continuing operations
|
$ | 79.9 | $ | 144.2 | $ | 363.5 | $ | 336.3 | ||||||||
Income
from continuing operations allocated to non-vested share
awards
|
(1.2 | ) | (1.5 | ) | (5.6 | ) | (3.6 | ) | ||||||||
Income
from continuing operations - basic
|
78.7 | 142.7 | 357.9 | 332.7 | ||||||||||||
Interest
expense on convertible notes
|
- | - | - | - | ||||||||||||
Income
tax effect
|
- | - | - | - | ||||||||||||
Income
from continuing operations - diluted
|
$ | 78.7 | $ | 142.7 | $ | 357.9 | $ | 332.7 | ||||||||
Weighted
average shares of common stock outstanding - basic
|
173.5 | 172.7 | 173.4 | 169.9 | ||||||||||||
Convertible
notes
|
- | - | - | 5.5 | ||||||||||||
Stock
options
|
0.5 | 0.6 | 0.3 | 0.6 | ||||||||||||
Weighted
average shares of common stock outstanding - diluted
|
174.0 | 173.3 | 173.7 | 176.0 | ||||||||||||
Income
from continuing operations per share:
|
||||||||||||||||
Basic
|
$ | 0.45 | $ | 0.82 | $ | 2.06 | $ | 1.96 | ||||||||
Diluted
|
$ | 0.45 | $ | 0.82 | $ | 2.06 | $ | 1.89 |
The
calculation of weighted average shares of common stock outstanding — diluted for
the three months ended September 30, 2009 and 2008, excludes 1.4 million and 0.5
million shares of common stock, respectively, issuable pursuant to outstanding
stock options because their effect was antidilutive. The calculation of weighted
average shares of common stock outstanding — diluted for the nine months ended
September 30, 2009 and 2008 excludes 2.6 million and 0.8 million shares of
common stock, respectively, issuable pursuant to outstanding stock options
because their effect was antidilutive.
NOTE
8. EMPLOYEE STOCK PLANS
Our
stock-based compensation plans provide for the granting or awarding of stock
options, restricted stock, restricted stock units, stock appreciation rights,
other stock-based awards and cash awards to directors, officers and other key
employees. Under the terms of our stock-based compensation plans, the number of
shares available for awards under the plans was adjusted pursuant to the terms
of the plans to prevent dilution as a result of the spin-off of Seahawk.
This adjustment resulted in additional shares being made available for awards
under the plans in the following amounts: 366,404 shares under our 2007
Long-Term Incentive Plan and 5,991 shares under our 2004 Directors' Stock
Incentive Plan. An adjustment was also made under our Employee Stock
Purchase Plan to add an additional 8,798 shares available for issuance under the
plan.
During
the nine months ended September 30, 2009, we granted approximately 1,189,000
stock options at a weighted average exercise price of $17.58. The weighted
average fair value per share of these stock-based awards estimated on the date
of grant using the Black-Scholes option pricing model was $10.38. The implied
volatility used to calculate the Black-Scholes fair value of stock-based awards
granted during the nine months ended September 30, 2009 increased to 68.7% from
35.1% in 2008, due to the significant changes in the market price of our common
stock in 2008. With the exception of volatility, there were no other significant
changes in the weighted average assumptions used to calculate the Black-Scholes
fair value of stock-based awards granted during the nine months ended September
30, 2009 from those used in 2008 as reported in Note 11 of our Annual Report on
Form 10-K for the year ended December 31, 2008.
During
the nine months ended September 30, 2009, we also granted approximately
1,797,000 restricted stock unit awards with a weighted average grant-date fair
value per share of $16.65. The restricted stock unit awards granted during 2009,
but prior to the Seahawk spin-off, were modified at the time of the spin-off to
increase the number of units to reflect the stock dividend associated with the
underlying shares. We granted 107,847 additional units, with a weighted average
grant-date fair value per share of $26.54 on the date of the spin-off.
Restricted stock unit awards that were granted prior to 2009 and were unvested
at the time of the spin-off were not modified, but the holders received a cash
dividend in lieu of additional units. As a result of Pride employees
transferring to Seahawk, 189,592 restricted stock unit awards were forfeited.
Awards of restricted stock that were unvested at the time of the spin-off were
not modified, but the holders of those restricted stock awards participated in
the spin-off on the same basis as the holders of our common stock and received
one fully vested share of Seahawk common stock for every 15 shares of restricted
stock held by the holder.
16
In
connection with the spin-off of Seahawk, we modified the outstanding stock
options to preserve the intrinsic value of each option to the holder. The
spin-off modifications resulted in an incremental increase in outstanding
options of 270,912 and a corresponding incremental compensation expense of $1.1
million, of which $0.6 million is reflected in our income from continuing
operations for the three and nine months ended September 30, 2009. The weighted
average exercise price of the modified options was $22.39 and the weighted
average fair value per share on the date of the spin-off was $9.55. The fair
value per share was calculated using expected terms of 0.1 to 4.7 years, implied
volatilities ranging from 41.51% to 45.67% and risk free interest rates ranging
from 0.12% to 2.48%.
NOTE
9. COMMITMENTS AND CONTINGENCIES
FCPA
Investigation
During
the course of an internal audit and investigation relating to certain of our
Latin American operations, our management and internal audit department received
allegations of improper payments to foreign government officials. In February
2006, the Audit Committee of our Board of Directors assumed direct
responsibility over the investigation and retained independent outside counsel
to investigate the allegations, as well as corresponding accounting entries and
internal control issues, and to advise the Audit Committee.
The
investigation, which is continuing, has found evidence suggesting that payments,
which may violate the U.S. Foreign Corrupt Practices Act, were made to
government officials in Venezuela and Mexico aggregating less than $1 million.
The evidence to date regarding these payments suggests that payments were made
beginning in early 2003 through 2005 (a) to vendors with the intent that they
would be transferred to government officials for the purpose of extending
drilling contracts for two jackup rigs and one semisubmersible rig operating
offshore Venezuela; and (b) to one or more government officials, or to vendors
with the intent that they would be transferred to government officials, for the
purpose of collecting payment for work completed in connection with offshore
drilling contracts in Venezuela. In addition, the evidence suggests that other
payments were made beginning in 2002 through early 2006 (a) to one or more
government officials in Mexico in connection with the clearing of a jackup rig
and equipment through customs, the movement of personnel through immigration or
the acceptance of a jackup rig under a drilling contract; and (b) with respect
to the potentially improper entertainment of government officials in
Mexico.
The Audit
Committee, through independent outside counsel, has undertaken a review of our
compliance with the FCPA in certain of our other international
operations. This review has found evidence suggesting that during the
period from 2001 through 2006 payments were made directly or indirectly to
government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola
and the Republic of the Congo in connection with clearing rigs or equipment
through customs or resolving outstanding issues with customs, immigration, tax,
licensing or merchant marine authorities in those countries. In addition, this
review has found evidence suggesting that in 2003 payments were made to one or
more third parties with the intent that they would be transferred to a
government official in India for the purpose of resolving a customs dispute
related to the importation of one of our jackup rigs. The evidence suggests that
the aggregate amount of payments referred to in this paragraph is less than $2.5
million. In addition, the U.S. Department of Justice ("DOJ") has asked us to
provide information with respect to (a) our relationships with a freight and
customs agent and (b) our importation of rigs into Nigeria.
The
investigation of the matters described above and the Audit Committee's
compliance review are ongoing. Accordingly, there can be no assurances that
evidence of additional potential FCPA violations may not be uncovered in those
or other countries.
Our
management and the Audit Committee of our Board of Directors believe it likely
that then members of our senior operations management either were aware, or
should have been aware, that improper payments to foreign government officials
were made or proposed to be made. Our former Chief Operating Officer resigned as
Chief Operating Officer effective on May 31, 2006 and has elected to retire from
the company, although he will remain an employee, but not an officer, during the
pendency of the investigation to assist us with the investigation and to be
available for consultation and to answer questions relating to our
business. His retirement benefits will be subject to the
determination by our Audit Committee or our Board of Directors that it does not
have cause (as defined in his retirement agreement with us) to terminate his
employment. Other personnel, including officers, have been terminated or placed
on administrative leave or have resigned in connection with the investigation.
We have taken and will continue to take disciplinary actions where appropriate
and various other corrective action to reinforce our commitment to conducting
our business ethically and legally and to instill in our employees our
expectation that they uphold the highest levels of honesty, integrity, ethical
standards and compliance with the law.
17
We
voluntarily disclosed information relating to the initial allegations and other
information found in the investigation and compliance review to the DOJ and the
SEC, and we have cooperated and continue to cooperate with these
authorities. For any violations of the FCPA, we may be subject to
fines, civil and criminal penalties, equitable remedies, including profit
disgorgement, and injunctive relief. Civil penalties under the antibribery
provisions of the FCPA could range up to $10,000 per violation, with a criminal
fine up to the greater of $2 million per violation or twice the gross pecuniary
gain to us or twice the gross pecuniary loss to others, if larger. Civil
penalties under the accounting provisions of the FCPA can range up to $500,000
per violation and a company that knowingly commits a violation can be fined up
to $25 million per violation. In addition, both the SEC and the DOJ could assert
that conduct extending over a period of time may constitute multiple violations
for purposes of assessing the penalty amounts. Often, dispositions for these
types of matters result in modifications to business practices and compliance
programs and possibly a monitor being appointed to review future business and
practices with the goal of ensuring compliance with the FCPA.
We are
engaged in discussions with the DOJ and the SEC regarding a potential negotiated
resolution of these matters, which could be settled during 2009 and which, as
described above, could involve a significant payment by us. We
believe that it is likely that any settlement will include both criminal and
civil sanctions. No amounts have been accrued related to any
potential fines, sanctions, claims or other penalties, which could be material
individually or in the aggregate, but an accrual could be made as early as the
fourth quarter of 2009. There can be no assurance that these discussions will
result in a final settlement of any or all of these issues or, if a settlement
is reached, the timing of any such settlement or that the terms of any such
settlement would not have a material adverse effect on us.
We could
also face fines, sanctions and other penalties from authorities in the relevant
foreign jurisdictions, including prohibition of our participating in or
curtailment of business operations in those jurisdictions and the seizure of
rigs or other assets. Our customers in those jurisdictions could seek to impose
penalties or take other actions adverse to our interests. We could
also face other third-party claims by directors, officers, employees,
affiliates, advisors, attorneys, agents, stockholders, debt holders, or other
interest holders or constituents of our company. For additional
information regarding a stockholder demand letter and related lawsuit with
respect to these matters, please see the discussion below under "- Demand
Letter". In addition, disclosure of the subject matter of the
investigation could adversely affect our reputation and our ability to obtain
new business or retain existing business from our current clients and potential
clients, to attract and retain employees and to access the capital
markets. No amounts have been accrued related to any potential fines,
sanctions, claims or other penalties referenced in this paragraph, which could
be material individually or in the aggregate.
We cannot
currently predict what, if any, actions may be taken by the DOJ, the SEC, any
other applicable government or other authorities or our customers or other third
parties or the effect the actions may have on our results of operations,
financial condition or cash flows, on our consolidated financial statements or
on our business in the countries at issue and other jurisdictions.
Environmental
Matters
We are
currently subject to pending notices of assessment issued from 2002 to 2009
pursuant to which governmental authorities in Brazil are seeking fines in an
aggregate amount of less than $750,000 for releases of drilling fluids from rigs
operating offshore Brazil. We are contesting these notices. We intend
to defend ourselves vigorously and, based on the information available to us at
this time, we do not expect the outcome of these assessments to have a material
adverse effect on our financial position, results of operations or cash flows;
however, there can be no assurance as to the ultimate outcome of these
assessments.
We are
currently subject to a pending administrative proceeding initiated in July 2009
by a governmental authority of Spain pursuant to which such governmental
authority is seeking payment in an aggregate amount of approximately $4 million
for an alleged environmental spill originating from the Pride North America while it
was operating offshore Spain. We expect to be indemnified for any payments
resulting from this incident by our client under the terms of the drilling
contract. The client has posted guarantees with the Spanish government to
cover potential penalties. We intend to defend ourselves vigorously and,
based on the information available to us at this time, we do not expect the
outcome of the proceeding to have a material adverse effect on our financial
position, results of operations or cash flows; however, there can be no
assurance as to the ultimate outcome of the proceeding.
18
Demand
Letter
In June
2009, we received a demand letter from counsel representing Kyle Arnold.
The letter states that Mr. Arnold is one of our stockholders and that he
believes that certain of our current and former officers and directors violated
their fiduciary duties related to the issues described above under “—FCPA
Investigation.” The letter requests that our Board of Directors take
appropriate action against the individuals in question. In response to
this letter, the Board has formed a special committee to evaluate the issues
raised by the letter and determine a course of action for the company. The
committee has retained counsel to advise it. Subsequent to the receipt of
that demand letter, on October 14, 2009, Mr. Arnold filed suit in the state
court of Harris County, Texas against us and certain of our current and former
officers and directors. The lawsuit, like the demand letter, alleged that
the individual defendants breached their fiduciary duties to us related to the
issues described above under “—FCPA Investigation.” Among other remedies,
the lawsuit sought damages and equitable relief against the individual
defendants, along with an award of attorney fees and other costs and expenses to
the plaintiff. On October 16, 2009, the plaintiff dismissed the lawsuit
without prejudice. The special committee continues to evaluate these
issues.
Loss
of Pride Wyoming
In
September 2008, the Pride
Wyoming, a 250-foot slot-type jackup rig owned by Seahawk and operating
in the U.S. Gulf of Mexico, was deemed a total loss for insurance purposes after
it was severely damaged and sank as a result of Hurricane Ike. Costs for removal
of the wreckage are expected to be covered by our insurance. Under the master
separation agreement between us and Seahawk, at Seahawk's option, we will be
required to finance, on a revolving basis, all of the costs for removal of the
wreckage and salvage operations until receipt of insurance proceeds. As of
September 30, 2009, there were no amounts outstanding under this financing
arrangement. Seahawk will be responsible for any costs not covered by
our insurance.
Potential
Seahawk Tax-Related Guarantees
In 2006
and 2007, Seahawk received tax assessments from the Mexican government related
to the operations of certain of its subsidiaries. Seahawk is
responsible for these assessments following the spin-off. Pursuant to
local statutory requirements, Seahawk has provided and may provide additional
surety bonds or other suitable collateral to contest these
assessments. Pursuant to a tax support agreement between us and
Seahawk, we have agreed to guarantee or indemnify the issuer of any such surety
bonds or other collateral issued for Seahawk’s account in respect of such
Mexican tax assessments made prior to the spin-off date. The amount
of such bonds or other collateral could total up to approximately $137.0 million
based on current exchange rates. Beginning on July 31, 2012, on each
subsequent anniversary thereafter, and on August 24, 2015, Seahawk will be
required to provide substitute credit support for a portion of the collateral
guaranteed or indemnified by us, so that our obligations are terminated in their
entirety by August 24, 2015. Pursuant to the tax support agreement,
Seahawk is required to pay us a fee based on the actual credit support
provided. As of September 30, 2009, we had not provided any guarantee
or indemnification for any surety bonds or other collateral under the tax
support agreement.
Other
We are
routinely involved in other litigation, claims and disputes incidental to our
business, which at times involve claims for significant monetary amounts, some
of which would not be covered by insurance. In the opinion of management, none
of the existing litigation will have a material adverse effect on our financial
position, results of operations or cash flows. However, a substantial settlement
payment or judgment in excess of our accruals could have a material adverse
effect on our financial position, results of operations or cash
flows.
NOTE
10. SEGMENT AND ENTERPRISE-RELATED INFORMATION
Our
reportable segments include Deepwater, which consists of our rigs capable of
drilling in water depths greater than 4,500 feet; Midwater, which consists of
our semisubmersible rigs capable of drilling in water depths of 4,500 feet or
less; and Independent Leg Jackups, which consists of our rigs capable of
operating in water depths up to 300 feet. We also manage the drilling operations
for deepwater rigs, which are included in a non-reported operating segment along
with corporate costs and other operations. The accounting policies
for our segments are the same as those described in Note 1 of our Consolidated
Financial Statements.
19
Summarized
financial information for our reportable segments are as follows:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Deepwater
revenues:
|
||||||||||||||||
Revenues
excluding reimbursables
|
$ | 189.9 | $ | 239.3 | $ | 634.4 | $ | 637.7 | ||||||||
Reimbursable
revenues
|
1.9 | 2.4 | 10.7 | 6.5 | ||||||||||||
Total
Deepwater revenues
|
191.8 | 241.7 | 645.1 | 644.2 | ||||||||||||
Midwater
revenues:
|
||||||||||||||||
Revenues
excluding reimbursables
|
96.8 | 118.7 | 338.9 | 276.3 | ||||||||||||
Reimbursable
revenues
|
1.4 | 1.4 | 4.8 | 3.4 | ||||||||||||
Total
Midwater revenues
|
98.2 | 120.1 | 343.7 | 279.7 | ||||||||||||
Independent
Leg Jackup revenues:
|
||||||||||||||||
Revenues
excluding reimbursables
|
72.6 | 74.3 | 220.7 | 192.4 | ||||||||||||
Reimbursable
revenues
|
0.2 | 0.2 | 0.6 | 0.3 | ||||||||||||
Total
Independent Leg Jackup revenues
|
72.8 | 74.5 | 221.3 | 192.7 | ||||||||||||
Other
|
21.7 | 26.7 | 65.5 | 94.9 | ||||||||||||
Corporate
|
1.6 | 0.3 | 1.8 | 0.9 | ||||||||||||
Total
revenues
|
$ | 386.1 | $ | 463.3 | $ | 1,277.4 | $ | 1,212.4 | ||||||||
Earnings
(loss) from continuing operations:
|
||||||||||||||||
Deepwater
|
$ | 71.8 | $ | 125.6 | $ | 300.9 | $ | 319.6 | ||||||||
Midwater
|
25.7 | 47.3 | 121.1 | 92.7 | ||||||||||||
Independent
Leg Jackups
|
32.6 | 38.3 | 102.3 | 90.7 | ||||||||||||
Other
|
1.6 | 1.2 | 3.9 | 7.1 | ||||||||||||
Corporate
|
(31.6 | ) | (27.4 | ) | (91.4 | ) | (98.9 | ) | ||||||||
Total
|
$ | 100.1 | $ | 185.0 | $ | 436.8 | $ | 411.2 | ||||||||
Capital
expenditures:
|
||||||||||||||||
Deepwater
|
$ | 195.5 | $ | 199.9 | $ | 620.3 | $ | 549.9 | ||||||||
Midwater
|
10.5 | 25.5 | 25.6 | 129.2 | ||||||||||||
Independent
Leg Jackups
|
2.5 | 8.9 | 9.7 | 26.6 | ||||||||||||
Other
|
10.1 | 0.3 | 12.1 | 2.3 | ||||||||||||
Corporate
|
5.3 | 8.7 | 18.3 | 26.5 | ||||||||||||
Discontinued
operations
|
- | 2.9 | 12.6 | 18.3 | ||||||||||||
Total
|
$ | 223.9 | $ | 246.2 | $ | 698.6 | $ | 752.8 | ||||||||
Depreciation
and amortization:
|
||||||||||||||||
Deepwater
|
$ | 19.0 | $ | 18.1 | $ | 56.8 | $ | 53.9 | ||||||||
Midwater
|
11.3 | 11.1 | 34.0 | 31.0 | ||||||||||||
Independent
Leg Jackups
|
7.3 | 6.9 | 21.3 | 19.9 | ||||||||||||
Other
|
0.1 | 0.4 | 0.3 | 1.4 | ||||||||||||
Corporate
|
1.8 | 1.5 | 5.9 | 3.5 | ||||||||||||
Total
|
$ | 39.5 | $ | 38.0 | $ | 118.3 | $ | 109.7 |
20
We
measure segment assets as property, equipment and goodwill. As of December 31,
2008, goodwill of $1.2 million related to our former mat-supported jackup
business is included in discontinued operations and was distributed in the
spin-off of the mat-supported jackup business. Our total long-lived
assets by segment as of September 30, 2009 and December 31, 2008 were as
follows:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Total
long-lived assets:
|
||||||||
Deepwater
|
$ | 3,595.6 | $ | 3,014.5 | ||||
Midwater
|
679.4 | 681.8 | ||||||
Independent
Leg Jackups
|
267.1 | 276.0 | ||||||
Other
|
22.9 | 10.9 | ||||||
Corporate
|
87.4 | 81.8 | ||||||
Discontinued
operations
|
- | 529.1 | ||||||
Total
|
$ | 4,652.4 | $ | 4,594.1 |
For the
three-month periods ended September 30, 2009 and 2008, we derived 96% and 97%,
respectively, of our revenues from countries other than the United States. For
the nine-month periods ended September 30, 2009 and 2008, we derived 97% and
96%, respectively, of our revenues from countries other than the United
States.
Significant
Customers
Our
significant customers were as follows:
Three
Months Ended
|
Nine
Months Ended
|
||||||
September
30,
|
September
30,
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
Petroleos
Brasileiro S.A.
|
35%
|
29%
|
30%
|
24%
|
|||
Total
S.A.
|
16%
|
14%
|
15%
|
12%
|
|||
BP
America and affiliates
|
3%
|
12%
|
3%
|
14%
|
|||
Exxon
Mobil Corporation
|
2%
|
10%
|
8%
|
12%
|
NOTE
11. OTHER SUPPLEMENTAL INFORMATION
Supplemental
cash flows and non-cash transactions were as follows:
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Decrease
(increase) in:
|
||||||||
Trade
receivables
|
$ | 45.9 | $ | (180.1 | ) | |||
Prepaid
expenses and other current assets
|
7.8 | (2.6 | ) | |||||
Other
assets
|
(19.5 | ) | (4.3 | ) | ||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
(30.9 | ) | (28.1 | ) | ||||
Accrued
expenses
|
50.7 | 9.6 | ||||||
Other
liabilities
|
5.3 | 27.2 | ||||||
Net
effect of changes in operating accounts
|
$ | 59.3 | $ | (178.3 | ) | |||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 44.7 | $ | 53.0 | ||||
Income
taxes
|
112.0 | 114.4 | ||||||
Change
in capital expenditures in accounts payable
|
33.2 | 14.2 |
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations should be read in
conjunction with the accompanying unaudited consolidated financial statements as
of September 30, 2009 and for the three months and nine months ended
September 30, 2009 and 2008 included elsewhere herein, and with our annual report
on Form 10-K for the year ended December 31, 2008. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under “Risk Factors” in Item 1A of Part II of this quarterly report and
our quarterly report on Form 10-Q for the quarter ended June 30, 2009 and Item
1A of our annual report
and elsewhere in this quarterly report. See “Forward-Looking Statements”
below.
Overview
We are
one of the world’s largest offshore drilling contractors. As of October 30,
2009, we operated a fleet of 23 rigs, consisting of two deepwater drillships, 12
semisubmersible rigs, seven independent leg jackups and two managed deepwater
drilling rigs. We also have four deepwater drillships under construction. Our
customers include major integrated oil and natural gas companies, state-owned
national oil companies and independent oil and natural gas companies. Our
competitors range from large international companies offering a wide range of
drilling services to smaller companies focused on more specific geographic or
technological areas.
We are
continuing to increase our emphasis on deepwater drilling. Although crude oil
prices have declined from the record levels reached in mid-2008, we believe the
long-term prospects for deepwater drilling are positive given that the expected
growth in oil consumption from developing nations, limited growth in crude oil
supplies and high depletion rates of mature oil fields, together with geologic
successes, improving access to promising offshore areas and new, more efficient
technologies, will continue to be catalysts for the long-term exploration and
development of deepwater fields. Since 2005, we have invested or committed to
invest over $3.6 billion in the expansion of our deepwater fleet, including
four new ultra-deepwater drillships under construction. Three of the drillships
have multi-year contracts at favorable rates, with two scheduled to work in the
strategically important deepwater U.S. Gulf of Mexico, which, in addition to our
operations in Brazil and West Africa, provides us with exposure to all three of
the world’s most active deepwater basins. Since 2005, we also have disposed of
non-core assets, generating $1.6 billion in proceeds, enabling us to
increasingly focus our financial and human capital on deepwater
drilling. Our transition to a pure offshore focused company with an
increasing emphasis on deepwater drilling is complete.
Our
customers have reduced exploration and development spending in 2009, especially
in midwater and shallow water drilling programs, due to the current economic
downturn and decline in crude oil prices. However, we anticipate that
deepwater activity will outperform other drilling sectors due to the longer
nature of deepwater field development, more favorable drilling economics and the
tendency for deepwater drilling programs to be more insulated to short-term
commodity price fluctuations. An increasing focus on deepwater
prospects by national oil companies, whose activities are less sensitive to
general economic factors, serve to provide further stability in the deepwater
sector. Our contract backlog at September 30, 2009 totals $7.2
billion and is comprised primarily of contracts for deepwater rigs with large
integrated oil and national oil companies possessing long-term development
plans. Our backlog, together with our existing cash on hand and
borrowing availability under our revolving credit facility, is expected to
provide sufficient financial resources to meet existing obligations through the
current economic global uncertainty.
Recent
Developments
Spin-off
of Mat-Supported Jackup Business
On August
24, 2009, we completed the spin-off of Seahawk Drilling, Inc., which holds the
assets and liabilities that were associated with our mat-supported jackup rig
business. In the spin-off, our stockholders received 100%
(approximately 11.6 million shares) of the outstanding common stock of Seahawk
by way of a pro rata stock dividend. Each of our stockholders of
record at the close of business on August 14, 2009 received one share of Seahawk
common stock for every 15 shares of our common stock held by such stockholder
and cash in lieu of any fractional shares of Seahawk common stock to which such
stockholder otherwise would have been entitled. In connection with
the spin-off, we made a cash contribution to Seahawk of approximately $47.3
million to achieve a targeted working capital for Seahawk as of May 31, 2009 of
$85 million. We and Seahawk also agreed to indemnify each other for
certain liabilities that may arise or be incurred in the future attributable to
our respective businesses.
Issuance of 8 ½% Senior Notes due
2019
On June
2, 2009, we completed an offering of $500.0 million aggregate principal
amount of 8 1/2% Senior Notes due 2019. We expect to use the net proceeds
from the offering of $492.4 million for general corporate purposes, which may
include payments with respect to our four drillships under construction and
other capital expenditures.
22
Contract
Termination
In
March 2009, we accelerated a planned inspection on our midwater
semisubmersible Pride
Venezuela. The rig had been working offshore Angola. An inspection of a
section of the rig’s hull revealed an unacceptable level of corrosion, which
will require a dry-dock facility to conduct permanent repairs. The hull repairs,
along with other maintenance and repairs to the rig, were expected to require
most of the remaining term of the rig’s then-existing contract, which had been
expected to conclude in March 2010. Consequently, in May 2009 we and
the customer mutually agreed to the termination of the remaining term of the
contract. No dry-dock facilities exist in Africa that can accommodate a
semisubmersible rig the size of the Pride Venezuela. Accordingly,
the rig is being mobilized to a shipyard in Dubai for further evaluation and to
determine the necessary repairs.
Upgrade
by S&P to Investment Grade
In March
2009, Standard & Poor’s Ratings Services upgraded our corporate credit
rating and the rating on our 7 3/8% senior notes due 2014 to an investment
grade BBB-, with a stable outlook. The upgrade reflected our balance
sheet improvement over the last several years and leverage metrics that compare
similarly to investment grade rated offshore drilling peers.
Investments
in Deepwater Fleet
In
January 2008, we entered into an agreement to construct a third
advanced-capability ultra-deepwater drillship, to be named Deep Ocean Mendocino. The
agreement provides for an aggregate fixed purchase price of approximately $635
million. The agreement provides that, following shipyard construction,
commissioning and testing, the drillship is to be delivered to us on or before
March 31, 2011. We have the right to rescind the contract for delays exceeding
certain periods and the right to liquidated damages for delays during certain
periods. We have entered into a multi-year drilling contract with respect to the
drillship, which is expected to commence during the second quarter of 2011
following the completion of shipyard construction, mobilization of the rig and
customer acceptance testing. Under the drilling contract, the customer may
elect, by January 31, 2010, a firm contract term of at least five years and up
to seven years in duration. Through September 30, 2009, we have spent
approximately $336 million on this construction project. We expect the total
project cost, including commissioning and testing, to be approximately $725
million, excluding capitalized interest.
In
January 2008, we entered into a five-year contract with respect to the
drillship, to be named Deep
Ocean Ascension, under construction that we acquired from Lexton Shipping
Ltd. for drilling operations in the U.S. Gulf of Mexico. Scheduled delivery of
this rig is in the first quarter of 2010. Work on the client’s behalf
is expected to commence mid-2010 following the completion of shipyard
construction, mobilization of the rig to the U.S. Gulf of Mexico and customer
acceptance testing. In connection with the contract, the drillship is being
modified from the original design to provide enhanced capabilities designed to
allow our clients to conduct subsea construction activities and other
simultaneous activities, while drilling or completing the well. Including these
modifications, amounts already paid, commissioning and testing, we expect the
total project cost to be approximately $750 million, excluding capitalized
interest. Through September 30, 2009, we have spent approximately $422 million
on this construction project.
In April
2008, we entered into a five-year contract with respect to our drillship, to be
named Deep Ocean
Clarion, under construction with a scheduled delivery in the third
quarter of 2010. The drilling contract is expected to commence in the beginning
of the first quarter of 2011 following the completion of shipyard construction,
mobilization of the rig to an initial operating location and customer acceptance
testing. In connection with the contract, the drillship is being modified from
the original design to provide enhanced capabilities designed to allow our
clients to conduct subsea construction activities and other simultaneous
activities, while drilling or completing the well. Including these
modifications, amounts already paid, commissioning and testing, we expect the
total project cost to be approximately $715 million, excluding capitalized
interest. Through September 30, 2009, we have spent approximately $325 million
on this construction project. Also, while we have previously purchased a license
to equip the rig for dual-activity use, the rig will not initially be functional
as a dual-activity rig, but can be modified to add this functionality in the
future.
In August
2008, we entered into an agreement for the construction of a fourth
ultra-deepwater drillship, to be named Deep Ocean Molokai. The
agreement provides for an aggregate fixed purchase price of approximately $655
million. The agreement provides that, following shipyard construction,
commissioning and testing, the drillship is to be delivered to us in or before
the fourth quarter of 2011. We have the right to rescind the contract for delays
exceeding certain periods and the right to liquidated damages for delays during
certain periods. Through September 30, 2009, we have spent approximately $276
million on this construction project. We expect the total project cost,
including commissioning and testing, to be approximately $750 million, excluding
capitalized interest. Although we currently do not have a drilling contract for
this drillship, we expect that the anticipated long-term demand for deepwater
drilling capacity in established and emerging basins should provide us with a
number of opportunities to contract the rig prior to its delivery
date.
There are risks of delay
inherent in any major shipyard project, including work stoppages, disputes,
financial and other difficulties encountered by the shipyard, and adverse
weather conditions. For our ultra-deepwater drillships under construction, we
have attempted to mitigate risks of delay by selecting the same shipyard for all
four construction projects with fixed-fee contracts, although some of the other
risks are more concentrated.
23
Dispositions
In
February 2008, we completed the sale of our fleet of three self-erecting,
tender-assist rigs for $213 million in cash. We operated one of the rigs until
mid-April 2009, when we transitioned the operations of that rig to the
owner.
In May
2008, we sold our entire fleet of platform rigs and related land, buildings and
equipment for $66 million in cash. In connection with the sale, we entered into
lease agreements with the buyer to operate two platform rigs until their
existing contracts are completed. In March 2009, the contract for one
of these rigs was canceled and the rig was subsequently transitioned to the
buyer at the beginning of April 2009. A contract extension was
granted for the remaining rig, which we continued to operate until the spin-off
of Seahawk in August 2009 as this contract was included in Seahawk’s business.
The leases required us to pay to the buyer all revenues from the operation of
the rigs, less operating costs and a small per day management fee, which we
retained.
In July
2008, we entered into agreements to sell our Eastern Hemisphere land rig
business, which constituted our only remaining land drilling operations, for $95
million in cash. The sale of all but one of the rigs closed in the fourth
quarter of 2008. We leased the remaining rig to the buyer until the sale of that
rig closed, which occurred in the second quarter of 2009.
We have
reclassified the historical results of operations of our former Latin America
Land and E&P Services segments, three tender-assist rigs, Eastern Hemisphere
land rig operations and mat-supported jackup business to discontinued
operations.
Unless
noted otherwise, the discussion and analysis that follows relates to our
continuing operations only.
Loss
of Pride Wyoming
In
September 2008, the Pride
Wyoming, a 250-foot slot-type jackup rig owned by Seahawk and operating
in the U.S. Gulf of Mexico, was deemed a total loss for insurance purposes after
it was severely damaged and sank as a result of Hurricane Ike. Costs for removal
of the wreckage are expected to be covered by our insurance. Under the master
separation agreement between us and Seahawk, at Seahawk's option, we will be
required to finance, on a revolving basis, all of the costs for removal of the
wreckage and salvage operations until receipt of insurance proceeds. As of
September 30, 2009, there were no amounts outstanding under this financing
arrangement. Seahawk will be responsible for any costs not covered by
our insurance.
FCPA
Investigation
During
the course of an internal audit and investigation relating to certain of our
Latin American operations, our management and internal audit department received
allegations of improper payments to foreign government officials. In February
2006, the Audit Committee of our Board of Directors assumed direct
responsibility over the investigation and retained independent outside counsel
to investigate the allegations, as well as corresponding accounting entries and
internal control issues, and to advise the Audit Committee.
The
investigation, which is continuing, has found evidence suggesting that payments,
which may violate the U.S. Foreign Corrupt Practices Act, were made to
government officials in Venezuela and Mexico aggregating less than $1 million.
The evidence to date regarding these payments suggests that payments were made
beginning in early 2003 through 2005 (a) to vendors with the intent that they
would be transferred to government officials for the purpose of extending
drilling contracts for two jackup rigs and one semisubmersible rig operating
offshore Venezuela; and (b) to one or more government officials, or to vendors
with the intent that they would be transferred to government officials, for the
purpose of collecting payment for work completed in connection with offshore
drilling contracts in Venezuela. In addition, the evidence suggests that other
payments were made beginning in 2002 through early 2006 (a) to one or more
government officials in Mexico in connection with the clearing of a jackup rig
and equipment through customs, the movement of personnel through immigration or
the acceptance of a jackup rig under a drilling contract; and (b) with respect
to the potentially improper entertainment of government officials in
Mexico.
24
The Audit
Committee, through independent outside counsel, has undertaken a review of our
compliance with the FCPA in certain of our other international
operations. This review has found evidence suggesting that during the
period from 2001 through 2006 payments were made directly or indirectly to
government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola
and the Republic of the Congo in connection with clearing rigs or equipment
through customs or resolving outstanding issues with customs, immigration, tax,
licensing or merchant marine authorities in those countries. In addition, this
review has found evidence suggesting that in 2003 payments were made to one or
more third parties with the intent that they would be transferred to a
government official in India for the purpose of resolving a customs dispute
related to the importation of one of our jackup rigs. The evidence suggests that
the aggregate amount of payments referred to in this paragraph is less than $2.5
million. In addition, the U.S. Department of Justice ("DOJ") has asked us to
provide information with respect to (a) our relationships with a freight and
customs agent and (b) our importation of rigs into Nigeria.
The
investigation of the matters described above and the Audit Committee's
compliance review are ongoing. Accordingly, there can be no assurances that
evidence of additional potential FCPA violations may not be uncovered in those
or other countries.
Our
management and the Audit Committee of our Board of Directors believe it likely
that then members of our senior operations management either were aware, or
should have been aware, that improper payments to foreign government officials
were made or proposed to be made. Our former Chief Operating Officer resigned as
Chief Operating Officer effective on May 31, 2006 and has elected to retire from
the company, although he will remain an employee, but not an officer, during the
pendency of the investigation to assist us with the investigation and to be
available for consultation and to answer questions relating to our
business. His retirement benefits will be subject to the
determination by our Audit Committee or our Board of Directors that it does not
have cause (as defined in his retirement agreement with us) to terminate his
employment. Other personnel, including officers, have been terminated or placed
on administrative leave or have resigned in connection with the investigation.
We have taken and will continue to take disciplinary actions where appropriate
and various other corrective action to reinforce our commitment to conducting
our business ethically and legally and to instill in our employees our
expectation that they uphold the highest levels of honesty, integrity, ethical
standards and compliance with the law.
We
voluntarily disclosed information relating to the initial allegations and other
information found in the investigation and compliance review to the DOJ and the
SEC, and we have cooperated and continue to cooperate with these
authorities. For any violations of the FCPA, we may be subject to
fines, civil and criminal penalties, equitable remedies, including profit
disgorgement, and injunctive relief. Civil penalties under the antibribery
provisions of the FCPA could range up to $10,000 per violation, with a criminal
fine up to the greater of $2 million per violation or twice the gross pecuniary
gain to us or twice the gross pecuniary loss to others, if larger. Civil
penalties under the accounting provisions of the FCPA can range up to $500,000
per violation and a company that knowingly commits a violation can be fined up
to $25 million per violation. In addition, both the SEC and the DOJ could assert
that conduct extending over a period of time may constitute multiple violations
for purposes of assessing the penalty amounts. Often, dispositions for these
types of matters result in modifications to business practices and compliance
programs and possibly a monitor being appointed to review future business and
practices with the goal of ensuring compliance with the FCPA.
We are
engaged in discussions with the DOJ and the SEC regarding a potential negotiated
resolution of these matters, which could be settled during 2009 and which, as
described above, could involve a significant payment by us. We
believe that it is likely that any settlement will include both criminal and
civil sanctions. No amounts have been accrued related to any
potential fines, sanctions, claims or other penalties, which could be material
individually or in the aggregate, but an accrual could be made as early as the
fourth quarter of 2009. There can be no assurance that these discussions will
result in a final settlement of any or all of these issues or, if a settlement
is reached, the timing of any such settlement or that the terms of any such
settlement would not have a material adverse effect on us.
We could
also face fines, sanctions and other penalties from authorities in the relevant
foreign jurisdictions, including prohibition of our participating in or
curtailment of business operations in those jurisdictions and the seizure of
rigs or other assets. Our customers in those jurisdictions could seek to impose
penalties or take other actions adverse to our interests. We could
also face other third-party claims by directors, officers, employees,
affiliates, advisors, attorneys, agents, stockholders, debt holders, or other
interest holders or constituents of our company. For additional
information regarding a stockholder demand letter and related lawsuit with
respect to these matters, please see the discussion under "- Demand
Letter" in Note 9 of the Notes to Unaudited Financial Statements in Item 1 of
Part I of this quarterly report. In addition, disclosure of the
subject matter of the investigation could adversely affect our reputation and
our ability to obtain new business or retain existing business from our current
clients and potential clients, to attract and retain employees and to access the
capital markets. No amounts have been accrued related to any
potential fines, sanctions, claims or other penalties referenced in this
paragraph, which could be material individually or in the
aggregate.
We cannot
currently predict what, if any, actions may be taken by the DOJ, the SEC, any
other applicable government or other authorities or our customers or other third
parties or the effect the actions may have on our results of operations,
financial condition or cash flows, on our consolidated financial statements or
on our business in the countries at issue and other jurisdictions.
25
Our
Business
We
provide contract drilling services to major integrated, government-owned and
independent oil and natural gas companies throughout the world. Our drilling
fleet competes on a global basis, as offshore rigs generally are highly mobile
and may be moved from one region to another in response to demand. While the
cost of moving a rig and the availability of rig-moving vessels may cause the
supply and demand balance to vary somewhat between regions, significant
variations between regions do not tend to persist long-term because of rig
mobility. Key factors in determining which qualified contractor is awarded a
contract include pricing, safety performance and operations
competency. Rig availability, location and technical ability can also
be key factors in the determination. Currently, all of our drilling contracts
with our customers are on a dayrate basis, where we charge the customer a fixed
amount per day regardless of the number of days needed to drill the well. We
provide the rigs and drilling crews and are responsible for the payment of rig
operating and maintenance expenses. Our customer bears the economic risk and
benefit relative to the geologic success of the wells to be
drilled.
The
markets for our drilling services have historically been highly cyclical. Our
operating results are significantly affected by the level of energy industry
spending for the exploration and development of crude oil and natural gas
reserves. Oil and natural gas companies’ exploration and development drilling
programs drive the demand for drilling services. These drilling programs are
affected by a number of factors, including oil and natural gas companies’
expectations regarding crude oil and natural gas prices. Some drilling programs
are influenced by short-term expectations, such as shallow water drilling
programs in the U.S. Gulf of Mexico and the Middle East, while others,
especially deepwater drilling programs, are typically subject to a longer term
view of crude oil prices. Other drivers include anticipated production levels,
worldwide demand for crude oil and natural gas products and many other factors.
Access to quality drilling prospects, exploration success, availability of
qualified rigs and operating personnel, relative production costs, availability
and lead time requirements for drilling and production equipment, the stage of
reservoir development and political and regulatory environments also affect our
customers’ drilling programs. Crude oil and natural gas prices are highly
volatile, which has historically led to significant fluctuations in expenditures
by our customers for oil and natural gas drilling services. Variations in market
conditions during the cycle impact us in different ways depending primarily on
the length of drilling contracts in different regions. For example, contracts
for jackup rigs in certain shallow water markets are shorter term, so a
deterioration or improvement in market conditions tends to quickly impact
revenues and cash flows from those operations. Contracts in deepwater and other
international offshore markets tend to be longer term, so a change in market
conditions tends to have a delayed impact. Accordingly, short-term changes in
market conditions may have minimal impact on revenues and cash flows from those
operations unless the timing of contract renewals takes place during the
short-term changes in the market.
Our
revenues depend principally upon the number of our available rigs, the number of
days these rigs are utilized and the contract dayrates received. The number of
days our rigs are utilized and the contract dayrates received are largely
dependent upon the balance of supply of drilling rigs and demand for drilling
services for the different rig classes we operate, as well as our rigs’
operational performance, including mechanical efficiency. The number of rigs we
have available may increase or decrease as a result of the acquisition or
disposal of rigs, the construction of new rigs, the number of rigs being
upgraded or repaired or undergoing standard periodic surveys or routine
maintenance at any time and the number of rigs idled during periods of
oversupply in the market or when we are unable to contract our rigs at
economical rates. In order to improve utilization or realize higher
contract dayrates, we may mobilize our rigs from one geographic region to
another for which we may receive a mobilization fee from the client.
Mobilization fees are deferred and recognized as revenue over the term of the
contract.
We
organize our reportable segments based on the general asset class of our
drilling rigs. Our reportable segments include Deepwater, which consists of our
rigs capable of drilling in water depths greater than 4,500 feet; Midwater,
which consists of our semisubmersible rigs capable of drilling in water depths
of 4,500 feet or less; and Independent Leg Jackups, which consists of our rigs
capable of operating in water depths up to 300 feet. We also manage the drilling
operations for deepwater rigs, which are included in a non-reported operating
segment along with corporate costs and other operations.
Our
earnings from operations are primarily affected by revenues, utilization of our
fleet and the cost of labor, repairs, insurance and maintenance. Many of our
drilling contracts covering multiple years allow us to adjust the dayrates
charged to our customer based on changes in operating costs, such as increases
in labor costs, maintenance and repair costs and insurance costs. Some of our
costs are fixed in nature or do not vary at the same time or to the same degree
as changes in revenue. For instance, if a rig is expected to be idle between
contracts and earn no revenue, we may maintain our rig crew, which reduces our
earnings as we cannot fully offset the impact of the lost revenues with
reductions in operating costs. In addition, some drilling contracts provide for
the payment of bonus revenues, representing a percentage of the rig’s contract
dayrate and based on the rig meeting defined operations performance during a
period.
26
Our
industry has traditionally been affected by shortages of, and competition for,
skilled rig crew personnel during high levels of activity in the drilling
industry, and due to the aging workforce and the training and skill set of
applicants. Even as overall industry activity declines, we expect these
personnel shortages to continue, especially in the deepwater segments, due to
the number of newbuild deepwater rigs expected to be delivered through 2012 and
the need for highly skilled personnel to operate these rigs. To better retain
and attract skilled rig personnel, we offer competitive compensation programs
and have increased our focus on training and management development programs.
Labor costs have continued to increase in 2009, especially for skilled personnel
in certain geographic locations, although the more challenging business
environment characterized by reduced offshore activity has slowed the rate of
increase of such costs in 2009. Labor costs are expected to increase further in
2010. Prior to the reduction in offshore activity, increased demand
for contract drilling operations resulted in an increased demand for oilfield
equipment and spare parts, which, when coupled with the consolidation of
equipment suppliers, resulted in longer order lead times to obtain critical
spares and other critical equipment components essential to our business, higher
repair and maintenance costs and longer out-of-service time for major repair and
upgrade projects. We maintain higher levels of critical spares in an effort to
minimize unplanned downtime. With the decline in prices for steel and other key
inputs and the decline in level of business activity, we believe that some
softening of lead times and pricing for spare parts and equipment is likely to
occur. The amount and timing of such softening will be affected by our
suppliers’ level of backlog and the number of remaining newbuilds.
The
decline in crude oil prices that began in late 2008, following the onset of the
global financial crisis, deteriorating global economic fundamentals and the
resulting decline in crude oil demand in a number of the world’s largest oil
consuming nations, continues to have a negative impact in 2009 on customer
demand for offshore rigs. Crude oil prices have averaged approximately $57 per
barrel during the first nine months of 2009 compared to $114 per barrel over the
same nine months in 2008. These lower prices along with the uncertainty of
prices in the near-term have contributed heavily to a significant reduction in
planned 2009 offshore drilling expenditures by our customers. Worldwide offshore
fleet utilization has declined to its lowest level since early 2000, to
approximately 75% at September 30, 2009 as compared to 89% at September 30,
2008. This decline has been more pronounced in exploration activities, which are
by their nature shorter term projects. Deepwater drilling activity has
displayed more resilience during the more challenging business environment in
2009 relative to other offshore drilling activities, especially for projects
currently in a development phase. This is due to the long-term
planning horizon common among our customers when engaged in deepwater
development programs. Utilization for the industry’s deepwater fleet has
historically not been subject to the extreme fluctuations as experienced within
the shallow water market even during market downturns. Although crude oil prices
recently closed above $80 per barrel, representing a better than 130%
improvement since declining to a 2009 low of $34 per barrel in February 2009,
many clients have postponed drilling programs to later years while others
continue to engage in subletting of rigs in an effort to reduce their capital
commitments during a period of increased price
uncertainty. Historically, greater confidence by our customers in a
sustainable range for crude oil prices has led to increased exploration and
production spending, creating a stronger environment for offshore drilling
services. While the improvement in crude oil prices experienced since March 2009
is encouraging, a meaningful increase in our customers’ spending plans for
future periods may not be evident until improvement in oil market fundamentals
are present, including evidence of global economic expansion and reviving crude
oil demand.
We
believe that long-term market conditions for offshore drilling services are
supported by sound fundamental factors and that demand for certain offshore
rigs, especially deepwater units, should continue to remain strong for the next
several years, producing attractive opportunities for our deepwater rigs,
including those units under construction. We expect the long-term
global demand for deepwater offshore contract drilling services to be driven by
the return of expanding worldwide demand for crude oil and natural
gas as global economic growth returns, an increased focus by oil and
natural gas companies on deepwater offshore prospects, and increased global
participation by national oil companies. Customer requirements for deepwater
drilling capacity remain steady in the current business environment, as
successful results in exploration drilling conducted over the past several years
have led to numerous prolonged field development programs around the world,
placing deepwater assets in limited supply through 2010. We believe that
positive long-term economic trends and increased demand for crude oil will lead
to a sustainable trading range for crude oil prices in the future and increased
exploration and production spending. Should current global economic trends
continue to strengthen, we believe spending by our clients will increase in 2010
relative to 2009 spending levels. Geological successes in exploratory markets,
such as the numerous discoveries to date in the pre-salt formation offshore
Brazil, the lower tertiary trend in the U.S. Gulf of Mexico and deeper waters
offshore Angola, along with the continued development of a number of deepwater
projects in each of these regions, are expected to produce growing demand from
clients for deepwater rigs. Also, the emergence of a number of new deepwater
basins offshore India, Mexico, Australia, the Black Sea, and most recently
Sierra Leone, and in general more favorable conditions allowing international
oil companies access to promising offshore basins, should lead to growing demand
for deepwater rigs well into the next decade. Advances in offshore technology
which support increased efficiency in field development efforts, including
parallel drilling activities, are expected to further support the improving
long-term outlook for deepwater rig demand.
27
Our
deepwater fleet currently operates in West Africa, Brazil and the Mediterranean
Sea, and we expect to increase the breadth of our operations in the
strategically important U.S. Gulf of Mexico region in 2010 with the delivery of
the Deep Ocean
Ascension and Deep
Ocean Clarion, two of our four deepwater drillships currently under
construction. Including rig days for our drillships under
construction, based upon their scheduled delivery dates, we have 88% of our
available rig days for our deepwater fleet contracted in the final quarter of
2009, 98% in 2010, 82% in 2011 and 67% in 2012. Customer demand for deepwater
drilling rigs experienced a steady increase from 2005, with nearly all of the
industry’s fleet of 116 units under contract through the third quarter of 2009.
The high customer demand led to a steep rise in deepwater rig dayrates,
exceeding $600,000 per day for some multi-year contracts awarded in 2008.
Although modest declines have occurred from peak levels, dayrates for deepwater
rigs capable of drilling in greater than 7,000 feet of water and available in
2010 have remained strong. The deepwater drilling business continues to be
supported by strong geologic success, especially in Brazil, West Africa and the
U.S. Gulf of Mexico, which have led to a growing number of commercial
discoveries, and the emergence of new, promising deepwater regions, such as
those found in India, Malaysia, North Africa, Mexico and the Black
Sea. In addition, the business is supported by advances in seismic
gathering and interpretation and well completion technologies. These factors
have contributed to strong backlog levels and contracted rig utilization at or
near 90% through the end of 2009 and well into 2010. In addition, deepwater
drilling economics have been aided in recent years by an expectation of higher
average crude oil prices, supported by global economic expansion and an
increased number of deepwater discoveries containing large volumes of
hydrocarbons. These improving factors associated with deepwater
activity have produced a growing base of development programs requiring multiple
years to complete and resulting in long-term contract awards by our customers,
especially for projects in the three traditional deepwater basins, and
represents a significant portion of our revenue backlog that currently extends
into 2016. Although we believe the deepwater segment is experiencing a
period of long-term global expansion that could continue well into the next
decade, the onset of the global financial crisis in 2008 has caused several of
our clients to postpone deepwater exploration and development plans, reducing
the urgency to contract deepwater rigs in 2009. Many customers are reassessing
offshore exploration plans and re-evaluating a number of planned deepwater
development projects in reaction to a period of increased global economic
uncertainty. We anticipate that some deepwater capacity may become
available during the fourth quarter of 2009 as a result of operators’ reluctance
to contract rigs in the near-term and an increased sensitivity to the cost of
rig services in an uncertain oil price environment, leading to a decline in
dayrates. The lower utilization and dayrate decline is most pronounced among the
conventionally moored deepwater semisubmersibles, which generally have the
ability to operate in water depths of 4,000 to 6,000 feet. Although
clients have shown a preference toward rigs with advanced capabilities,
including dynamic positioning and parallel well construction and field
development features, dayrates for these advanced deepwater rigs could
experience modest declines from levels experienced in 2009 should clients
continue to delay the commencement of large development programs to later years
at a time when deepwater capacity is increasing, particularly in 2011 and
2012. Dayrates for conventionally moored deepwater rigs are expected
to remain under pressure into 2010.
Our
midwater fleet currently operates offshore Africa and Brazil, and we expect this
geographic presence to remain unchanged through 2009. We currently have 65% of
our available rig days for our midwater fleet contracted in the last quarter of
2009, 67% in 2010, 64% in 2011 and 35% in 2012. During 2009, customer needs for
midwater rigs have declined, resulting in some rigs being idle. Subleasing
of rigs by clients has increased due to the uncertain economic climate,
increased difficulty with accessing capital resources and desire by many clients
to reduce capital expenditures to a level which approximates projected cash
flows in the year. We expect the subletting of rig time over the
balance of 2009 and into 2010 to remain active among customers until confidence
in a favorable outlook for crude oil prices increases. Midwater rig availability
is currently increasing, with 21 rigs idle worldwide at September 30, 2009,
compared to seven rigs at September 30, 2008, leading to a more challenging
near- to intermediate-term dayrate environment. The deteriorating midwater
segment fundamentals are due in part to the developing weakness in the deepwater
rig segment for conventionally moored deepwater rigs, in which these more
capable rigs are forced to bid reduced dayrates on work programs in shallower
water depths in an attempt to remain active, thereby eliminating a contract
opportunity that may have otherwise been available to a midwater
unit. Also, many of the industry’s midwater rigs are utilized in
mature offshore regions that are sensitive to crude oil price volatility, such
as the U.K. North Sea. Although three rigs are currently idle in the U.K. North
Sea, these units are not expected to migrate to other regions to secure work due
to the high cost of returning to the North Sea at some future
point. Finally, the number of midwater rigs located in the U.S. Gulf
of Mexico has declined significantly from 12 rigs in 2006 to four rigs at
present, due primarily to the risk of mooring system failures during hurricane
season, marginal geologic prospects and more attractive opportunities in other
regions, such as Brazil. Contract opportunities for midwater rigs with
availability over the next 12 months currently remain limited, increasing the
risk of additional idle capacity and leading to deteriorating utilization and
dayrates. During the second quarter of 2009, we and the customer mutually agreed
to terminate the Pride
Venezuela’s then-existing contract due to hull repairs and other
maintenance and repairs that were expected to require most of the remaining term
of the contract, which had been expected to conclude in March
2010. The Pride
Venezuela is being mobilized to a shipyard in Dubai for further
evaluation and to determine the necessary repairs. During the third
quarter of 2009, our semisubmersible rig, the Pride South Seas, completed a
contract offshore South Africa and is currently idle, with limited prospects for
further work in the near to intermediate term.
28
Our
independent leg jackup rig fleet currently operates in the Middle East, Asia
Pacific and West Africa. We currently have 56% of our available rig
days for our independent leg jackup fleet contracted in the last quarter of
2009, 25% in 2010, 7% in 2011 and none in 2012. The addition of new jackup rig
capacity represents a long-term threat to the segment. Since 2007, 60
jackup rigs have been added to the global fleet, with another 53 expected to be
added in 2010 to 2011. At present, 10 of the 60 delivered new build jackups have
failed to obtain an initial contract award following the completion of
construction and are idle in various shipyards in the Far East. The majority of
rigs being delivered in 2010 and beyond are without
contracts. Customer demand in 2009 has continued to fall below the
increasing supply of international jackup rigs, resulting in growing idle rig
capacity at a time when contact durations have shortened throughout the existing
fleet of jackup rigs. As of September 30, 2009, 72 rigs were idle in
the worldwide fleet, up from 13 at the same time in 2008. Dayrates
for standard international-class jackup rigs peaked during 2008 and have
fallen throughout 2009 as the utilization rate has declined below 80%. We expect
jackup utilization and dayrates to continue to decline in the near to
intermediate term as customers in the Middle East, West Africa and Asia reassess
drilling programs, existing jackup rigs complete contracts and new capacity is
added into the global supply. Aggregate jackup rig needs in Mexico were expected
to increase during 2009 as Petroleos Mexicanos (“PEMEX”) launched new offshore
drilling programs, but these potential needs have been postponed indefinitely,
resulting in a number of rigs going idle in the region. During the third quarter
of 2009, two of our jackup rigs in Mexico, the Pride Wisconsin and Pride Tennessee, completed
contracts with PEMEX, with no immediate prospects for work. Both rigs have been
relocated to the US Gulf of Mexico and stacked.
We
experienced approximately 215 and 385 out-of-service days for shipyard
maintenance and upgrade projects for the three and nine months ended September
30, 2009, respectively, for our existing fleet as compared to approximately 65
and 560 days for the three and nine months ended September 30, 2008,
respectively. For 2009, we expect the total number of out-of-service days to be
approximately 580 as compared to 560 days for 2008. Expected
out-of-service days for 2009 include 140 days for the Pride Venezuela.
Backlog
Our
backlog at September 30, 2009, totaled approximately $7.2 billion for our
executed contracts, with $2.7 billion attributable to our ultra-deepwater
drillships under construction. We expect approximately $1.7 billion of our total
backlog to be realized in the next 12 months. Our backlog at December 31, 2008
was approximately $8.6 billion. We calculate our backlog, or future contracted
revenue for our offshore fleet, as the contract dayrate multiplied by the number
of days remaining on the contract, assuming full utilization. Backlog excludes
revenues for mobilization, demobilization, contract preparation, customer
reimbursables and performance bonuses. The amount of actual revenues earned and
the actual periods during which revenues are earned will be different than the
amount disclosed or expected due to various factors. Downtime due to various
operating factors, including unscheduled repairs, maintenance, weather and other
factors, may result in lower applicable dayrates than the full contractual
operating dayrate, as well as the ability of our customers to terminate
contracts under certain circumstances.
The
following table reflects the percentage of rig days committed by year as of
September 30, 2009. The percentage of rig days committed is calculated as the
ratio of total days committed under firm contracts (as well as scheduled
shipyard, survey and mobilization days for 2009 and 2010) to total available
days in the period. Total available days have been calculated based on the
expected delivery dates for our four ultra-deepwater rigs under
construction.
For
the Years Ending December 31,
|
|||||||
2009(1)
|
2010
|
2011
|
2012
|
||||
Rig
Days Committed
|
|||||||
Deepwater
|
88%
|
98%
|
82%
|
67%
|
|||
Midwater
|
65%
|
67%
|
64%
|
35%
|
|||
Independent
Leg Jackups
|
56%
|
25%
|
7%
|
0%
|
____________
(1)
|
Represents
the three-month period beginning October 1,
2009.
|
29
Segment
Review
Our
reportable segments include Deepwater, which consists of our rigs capable of
drilling in water depths greater than 4,500 feet; Midwater, which consists of
our semisubmersible rigs capable of drilling in water depths of 4,500 feet or
less; and Independent Leg Jackups, which consist of our rigs capable of
operating in water depths up to 300 feet. We also manage the drilling operations
for deepwater rigs, which are included in a non-reported operating segment along
with corporate costs and other operations.
The
following table summarizes our revenues and earnings from continuing operations
by our reportable segments:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Deepwater
revenues:
|
(In
millions)
|
(In
millions)
|
||||||||||||||
Revenues
excluding reimbursables
|
$ | 189.9 | $ | 239.3 | $ | 634.4 | $ | 637.7 | ||||||||
Reimbursable
revenues
|
1.9 | 2.4 | 10.7 | 6.5 | ||||||||||||
Total
Deepwater revenues
|
191.8 | 241.7 | 645.1 | 644.2 | ||||||||||||
Midwater
revenues:
|
||||||||||||||||
Revenues
excluding reimbursables
|
96.8 | 118.7 | 338.9 | 276.3 | ||||||||||||
Reimbursable
revenues
|
1.4 | 1.4 | 4.8 | 3.4 | ||||||||||||
Total
Midwater revenues
|
98.2 | 120.1 | 343.7 | 279.7 | ||||||||||||
Independent
Leg Jackup revenues:
|
||||||||||||||||
Revenues
excluding reimbursables
|
72.6 | 74.3 | 220.7 | 192.4 | ||||||||||||
Reimbursable
revenues
|
0.2 | 0.2 | 0.6 | 0.3 | ||||||||||||
Total
Independent Leg Jackup revenues
|
72.8 | 74.5 | 221.3 | 192.7 | ||||||||||||
Other
|
21.7 | 26.7 | 65.5 | 94.9 | ||||||||||||
Corporate
|
1.6 | 0.3 | 1.8 | 0.9 | ||||||||||||
Total
revenues
|
$ | 386.1 | $ | 463.3 | $ | 1,277.4 | $ | 1,212.4 | ||||||||
Earnings
(loss) from continuing operations:
|
||||||||||||||||
Deepwater
|
$ | 71.8 | $ | 125.6 | $ | 300.9 | $ | 319.6 | ||||||||
Midwater
|
25.7 | 47.3 | 121.1 | 92.7 | ||||||||||||
Independent
Leg Jackups
|
32.6 | 38.3 | 102.3 | 90.7 | ||||||||||||
Other
|
1.6 | 1.2 | 3.9 | 7.1 | ||||||||||||
Corporate
|
(31.6 | ) | (27.4 | ) | (91.4 | ) | (98.9 | ) | ||||||||
Total
|
$ | 100.1 | $ | 185.0 | $ | 436.8 | $ | 411.2 |
The
following table summarizes our average daily revenues and utilization percentage
by segment:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
Average
Daily Revenues (1)
|
Utilization
(2)
|
Average
Daily Revenues (1)
|
Utilization
(2)
|
Average
Daily Revenues (1)
|
Utilization
(2)
|
Average
Daily Revenues (1)
|
Utilization
(2)
|
|||||||||||||||||||||||||
Deepwater
|
$ | 343,200 | 76% | $ | 333,600 | 98% | $ | 338,600 | 87% | $ | 303,000 | 97% | ||||||||||||||||||||
Midwater
|
$ | 264,100 | 67% | $ | 258,800 | 84% | $ | 260,900 | 80% | $ | 235,600 | 72% | ||||||||||||||||||||
Independent
Leg Jackups
|
$ | 123,100 | 92% | $ | 124,200 | 93% | $ | 123,100 | 94% | $ | 117,600 | 85% |
____________
(1)
|
Average
daily revenues are based on total revenues for each type of rig divided by
actual days worked by all rigs of that type. Average daily revenues will
differ from average contract dayrate due to billing adjustments for any
non-productive time, mobilization fees, demobilization fees, performance
bonuses and charges to the customer for ancillary
services.
|
(2)
|
Utilization
is calculated as the total days worked divided by the total days in the
period.
|
30
Deepwater
Revenues
for our deepwater segment decreased $49.9 million, or 21%, for the three months
ended September 30, 2009 over the comparable period in 2008 primarily due to
decreased utilization of the
Pride North America, which experienced approximately 79 out-of-service
days as a result of a scheduled five year regulatory inspection and client
requested upgrades in the third quarter of 2009, the Pride Portland, which
experienced 30 out-of-service days due to a required scheduled five year special
periodic survey and major maintenance, the Pride South Pacific, which
was mobilized to Cape Town for a regulatory inspection, experiencing 32
out-of-service days, and higher mechanical downtime on the Pride Carlos Walter resulting
in 21 out-of-service days. Collectively, these factors contributed to a decrease
in revenues of approximately $69.0 million over the comparable period in
2008. This decrease in revenues was partially offset by higher
contracted dayrate for the Pride South Pacific,
contributing $17.8 million. As a result of the out-of-service time in
2009 on rigs earning relatively high dayrates, average daily revenues decreased
3% for the three months ended September 30, 2009 over the comparable period in
2008. Earnings from operations decreased $53.8 million, or 43%, for the three
months ended September 30, 2009 over the comparable period in 2008 due to the
decrease in revenues as well as an increase in repair and maintenance costs
across our fleet. Utilization decreased to 76% for the three months ended
September 30, 2009 as compared to 98% for the three months ended September 30,
2008 primarily due to the decreased utilization of the Pride North America, Pride South
Pacific, Pride Portland and Pride Carlos Walter as
described above.
Revenues
for our deepwater segment increased $0.9 million, or less than 1%, for the nine
months ended September 30, 2009 over the comparable period in 2008. The increase
in revenues is primarily due to higher contracted dayrates for the Pride Angola, Pride Brazil,
Pride Carlos Walter and
Pride South Pacific,
partially offset by decreased revenues from the Pride Rio de Janeiro, which
worked at a higher dayrate in 2008 as a result of a short-term farm out
assignment. Collectively, the increase in dayrates for these rigs contributed
approximately $75.8 million of incremental revenues over the comparable period
in 2008. This revenue increase was offset by the decreased utilization as a
result of higher out-of-service time primarily related to shipyard projects
during 2009 and higher mechanical downtime on the Pride Carlos Walter and the
Pride North America.
During 2009, our deepwater fleet experienced a total of 220 more out-of-service
days related to shipyard projects over the comparable period in
2008. These factors contributed to a decrease in revenues of
approximately $74.5 million over the comparable period in
2008. Primarily as a result of the higher dayrates described above,
average daily revenues increased 12% for the nine months ended September 30,
2009 over the comparable period in 2008. Earnings from
operations decreased $18.7
million, or 6%, for the nine months ended September 30, 2009 over the comparable
period in 2008 due to an increase in total labor costs for our rig crews as a
result of increased labor costs for the offshore workforce, as well as an
increase in repair and maintenance costs for our rigs. Utilization decreased to
87% for the nine months ended September 30, 2009 as compared to 97% for the nine
months ended September 30, 2008 primarily due to higher out-of-service time
related to shipyard projects during 2009.
Midwater
Revenues
for our midwater segment decreased $21.9 million, or 18%, for the three months
ended September 30, 2009 over the comparable period in 2008. The decrease in
revenues is primarily due to lower activity experienced in 2009, including the
Pride Venezuela, which
was idle during the third quarter of 2009, and the Pride South Seas, which
completed its contract in August of 2009 and was idle thereafter, partially
offset by a higher utilization of the Pride Mexico and the Pride South Atlantic in
2009. These factors collectively contributed to a net decrease
in revenues of approximately $26.6 million over the comparable period in
2008. The decrease in revenues was partially offset by the
recognition of $5.0 million related to an expired option from one of our
customers on the Pride South
Atlantic during 2009. Average daily revenues increased 2% for
the three months ended September 30, 2009 over the comparable period in 2008.
Earnings from operations decreased $21.6 million, or 46%, for the three months
ended September 30, 2009 over the comparable period in 2008 primarily due to the
decrease in revenues. Utilization decreased to 67% for the three
months ended September 30, 2009 from 84% for the three months ended September
30, 2008 primarily due to the decreased utilization of the Pride Venezuela and the Pride South
Seas.
Revenues
for our midwater segment increased $64.0 million, or 23%, for the nine months
ended September 30, 2009 over the comparable period in 2008. The increase in
revenues is primarily due to higher utilization on the Pride Mexico, which started
operations in July 2008 after its shipyard project, the Pride South Seas, which
experienced no shipyard time during the eight months working in 2009 as opposed
to 76 shipyard days recorded in 2008, the Sea Explorer, which had lower
transit time in 2009, and lower mechanical downtime on the Pride South Atlantic,
partially offset by the lower utilization of the Pride Venezuela as a result
of the agreement with the customer to terminate its current contract. These
factors resulted in incremental revenues of $33.9 million over the comparable
period in 2008. The increased revenues were also due to the higher
dayrates of the Pride
Venezuela, the Sea
Explorer and the Pride
South Seas, which resulted in incremental revenue of approximately $29.7
million over the comparable period in 2008. Earnings from operations increased
$28.4 million, or 31%, for the nine months ended September 30, 2009 over the
comparable period in 2008 due to the increase in revenues, offset partially by
increased costs related to higher activity for the Pride Mexico, higher rental
and transportation costs on the Pride Venezuela and higher depreciation
expense from the Pride
Mexico and Pride South
Seas as a result of their 2008 shipyard projects. Utilization
increased to 80% for the nine months ended September 30, 2009 from 72% for the
nine
months ended September 30, 2008 primarily due to the increased utilization of
the Pride Mexico, the
Pride South Atlantic,
the Pride South
Seas and the Sea
Explorer, partially offset by the decrease utilization of the Pride
Venezuela.
31
Independent
Leg Jackups
Revenues
for our independent leg jackup segment decreased $1.7 million, or 2%, for the
three months ended September 30, 2009 over the comparable period in
2008. The decrease in revenues is primarily due to the decreased
dayrate of the Pride Tennessee
and idle time experienced by the Pride Wisconsin, which was
partially offset by a full quarter of higher dayrate on the Pride Montana and higher
utilization of the Pride
Cabinda as a result of its 2008 shipyard project. Together, these rigs
contributed to a reduction of $2.3 million in revenue for the three months ended
September 30, 2009 over the comparable period in 2008. Earnings from operations
decreased $5.7 million, or 15%, for the three months ended September 30, 2009
over the comparable period in 2008 due to decreased revenues and increased labor
costs for our rig crews. Utilization decreased to 92% for the three months ended
September 30, 2009 from 93% for the three months ended September 30, 2008
primarily due to the decrease utilization for the Pride Wisconsin and Pride Tennessee offset by the
increase utilization of the Pride Cabinda.
Revenues
for our independent leg jackup segment increased $28.6 million, or 15%, for the
nine months ended September 30, 2009 over the comparable period in 2008
primarily due to the Pride
Montana, which operated on a contract with higher dayrate in the 2009
period, increasing revenues by $16.5 million, and higher utilization driven by
the Pride Cabinda as a
result of its 2008 shipyard project, partially offset by the higher
out-of-service time for regulatory inspections of the Pride Tennessee and idle time
experienced on the Pride
Wisconsin during 2009. Collectively, these three rigs contributed an
incremental $11.0 million of revenue for the nine months ended September 30,
2009 over the comparable period in 2008. Average daily revenues increased 5% for
the nine months ended September 30, 2009 over the comparable period in 2008
primarily due to higher utilization and dayrates for the Pride Cabinda and the Pride Montana. Earnings from
operations increased $11.6 million, or 13%, for the nine months ended September
30, 2009 over the comparable period in 2008 due to increased revenues offset
partially by increased costs for our rigs crews. Utilization increased to 94%
for the nine months ended September 30, 2009 from 85% for the nine months ended
September 30, 2008, primarily due to reduced shipyard time for the Pride Cabinda and Pride North Dakota offset by
decreased utilization of the Pride Wisconsin.
Other
Operations
Other
operations include our deepwater drilling operations management contracts and
other operating activities. Management contracts in 2009 include one
management contract that ended in the third quarter of 2009 and two contracts
that expire in 2011 and 2012 (with early termination permitted in certain
cases). Management contracts in 2008 included two contracts that
ended in the third and fourth quarters of 2008. Additionally, the
operations of our former platform rig fleet, which were historically included in
other operations, were part of Seahawk’s business.
Revenues
decreased $5.0 million, or 19%, for the three months ended September 30, 2009
over the comparable period in 2008 primarily due to the termination of two
management contracts in the second half of 2008 and a labor contract during the
third quarter of 2009, partially offset by higher reimbursable revenues during
the current quarter. Earnings from operations increased $0.4 million,
or 33%, for the three months ended September 30, 2009 over the comparable period
in 2008 primarily due to the increase in reimbursable revenues.
Revenues
decreased $29.4 million, or 31%, for the nine months ended September 30, 2009
over the comparable period in 2008 primarily due to the termination of two
management contracts in the second half of 2008 and a reduction in reimbursable
revenue period-over-period in connection with a labor contract. Earnings from
operations decreased $3.2 million, or 45%, for the nine months ended September
30, 2009 over the comparable period in 2008 primarily due to the decrease in
reimbursable revenues.
32
Results
of Operations
The
discussion below relating to significant line items represents our analysis of
significant changes or events that impact the comparability of reported amounts.
Where appropriate, we have identified specific events and changes that affect
comparability or trends and, where possible and practical, have quantified the
impact of such items.
The
following table presents selected consolidated financial information for our
continuing operations:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
millions)
|
(In
millions)
|
|||||||||||||||
REVENUES
|
||||||||||||||||
Revenues
excluding reimbursable revenues
|
$ | 379.5 | $ | 455.5 | $ | 1,253.0 | $ | 1,181.4 | ||||||||
Reimbursable
revenues
|
6.6 | 7.8 | 24.4 | 31.0 | ||||||||||||
386.1 | 463.3 | 1,277.4 | 1,212.4 | |||||||||||||
COSTS
AND EXPENSES
|
||||||||||||||||
Operating
costs, excluding depreciation and amortization
|
210.6 | 206.4 | 615.9 | 565.7 | ||||||||||||
Reimbursable
costs
|
5.8 | 7.4 | 21.6 | 29.8 | ||||||||||||
Depreciation
and amortization
|
39.5 | 38.0 | 118.3 | 109.7 | ||||||||||||
General
and administrative, excluding depreciation and
amortization
|
30.2 | 26.5 | 85.3 | 95.5 | ||||||||||||
Loss
(gain) on sales of assets, net
|
(0.1 | ) | - | (0.5 | ) | 0.5 | ||||||||||
286.0 | 278.3 | 840.6 | 801.2 | |||||||||||||
EARNINGS
FROM OPERATIONS
|
100.1 | 185.0 | 436.8 | 411.2 | ||||||||||||
OTHER
INCOME (EXPENSE), NET
|
||||||||||||||||
Interest
expense, net of amounts capitalized
|
- | (2.1 | ) | (0.1 | ) | (19.9 | ) | |||||||||
Refinancing
charges
|
- | - | - | (1.2 | ) | |||||||||||
Interest
income
|
0.6 | 2.9 | 2.6 | 15.1 | ||||||||||||
Other
income (expense), net
|
(2.7 | ) | 6.1 | (3.3 | ) | 15.7 | ||||||||||
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
98.0 | 191.9 | 436.0 | 420.9 | ||||||||||||
INCOME
TAXES
|
(18.1 | ) | (47.7 | ) | (72.5 | ) | (84.6 | ) | ||||||||
INCOME
FROM CONTINUING OPERATIONS, NET OF TAX
|
$ | 79.9 | $ | 144.2 | $ | 363.5 | $ | 336.3 |
33
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Revenues Excluding Reimbursable Revenues.
Revenues excluding reimbursable revenues for the three months ended
September 30, 2009 decreased $76.0 million, or 17%, over the comparable period
in 2008. For additional information about our revenues, please read “— Segment
Review” above.
Reimbursable Revenues.
Reimbursable revenues for the three months ended September 30, 2009 decreased
$1.2 million, or 15%, over the comparable period in 2008 primarily due to lower
activity in our other segment.
Operating Costs. Operating
costs for the three months ended September 30, 2009 increased $4.2
million, or 2%, over the comparable period in 2008. The increase was
primarily due to an increase in labor costs, partially offset by an increase in
out-of-service days for shipyard maintenance and upgrade projects. The increase
in labor cost in the 2009 period as compared to the 2008 period was primarily
due to termination costs of $6.2 million. This increase was partially offset by
an increase in out-of-service days of 215 days in 2009 compared to 65 days in
2008, which resulted in a decrease in operating costs of $2.0 million. Operating
costs as a percentage of revenues, excluding reimbursables, were 55% and
45% for the three months ended September 30, 2009 and 2008,
respectively.
Reimbursable Costs.
Reimbursable costs for the three months ended September 30, 2009 decreased $1.6
million, or 22%, over the comparable period in 2008 primarily due to lower
activity in our other segment.
Depreciation and Amortization.
Depreciation expense for the three months ended September 30, 2009
increased $1.5 million, or 4%, over the comparable period in 2008. This increase
relates to capital additions primarily in our midwater and deepwater
segments.
General and Administrative.
General and administrative expenses for the three months ended September
30, 2009 increased $3.7 million, or 14%, over the comparable period in
2008. The increase was due to a $2.8 million increase in wage and
benefits, including $0.6 million for spin-off stock based compensation
adjustments to continuing employees and $0.6 million in termination costs due to
reductions in headcount, and a $1.0 million increase in costs related to the
Seahawk spin-off, partially offset by a $0.5 million decrease in expenses
related to the ongoing investigation described under “—FCPA
Investigation”.
Gain on Sale of Assets, Net.
We had net gain on sales of assets of $0.1 million for the three months
ended September 30, 2009 primarily due to the sale of scrap
equipment.
Interest Expense. Interest
expense for the three months ended September 30, 2009 decreased $2.1 million
over the comparable period in 2008. During the period, interest
expense increased by $10.4 million as a result of the incremental interest
expense associated with the issuance of our 8 1/2% Senior Notes in June 2009,
which was offset by an increase in $12.5 million of capitalized
interest.
Interest Income. Interest
income for the three months ended September 30, 2009 decreased $2.3 million, or
79%, over the comparable period in 2008, due to the decrease in investment
income earned as a result of significantly lower investment yields
year-over-year. The decrease was also the result of maintaining lower average
cash balances due to the payments made for newbuild drillship construction
projects, as compared to the comparable period in 2008.
Other Income (Expense), Net.
Other income, net for the three months ended September 30, 2009 decreased
$8.8 million over the comparable period in 2008, primarily due to a $2.6 million
foreign exchange loss for the three month ended September 30, 2009 as compared
to a $6.0 million foreign exchange gain in the same period in 2008.
Income Taxes. Our
consolidated effective income tax rate for continuing operations for the three
months ended September 30, 2009 was 18.5% compared with 24.9% for the three
months ended September 30, 2008. The lower tax rate for the 2009 period was
principally the result of increased profitability in lower taxed jurisdictions
and tax benefits related to the finalization of certain tax
returns.
34
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Revenues Excluding Reimbursable
Revenues. Revenues excluding reimbursable revenues for the nine months
ended September 30, 2009 increased $71.6 million, or 6%, over the comparable
period in 2008. For additional information about our revenues, please read “—
Segment Review” above.
Reimbursable Revenues.
Reimbursable revenues for the nine months ended September 30, 2009 decreased
$6.6 million, or 21%, over the comparable period in 2008 primarily due to lower
activity in our other segment.
Operating Costs. Operating
costs for the nine months ended September 30, 2009 increased $50.2 million, or
9%, over the comparable period in 2008. The increase was primarily
due to higher labor costs and operating costs associated with the decrease in
out-of-service days. Out-of-service days for shipyard maintenance and upgrade
projects decreased from 560 days in the nine month period in 2008 to 385 days in
the comparable period in 2009. This decrease resulted in an increase in
rig labor costs of $31.4 million and an increase in operating costs of $14.1
million. In addition, we recognized $6.2 million in termination costs
during the nine months period in 2009. Operating costs as a percentage of
revenues, excluding reimbursables, were 49% and 48% for the nine months
ended September 30, 2009 and 2008, respectively.
Reimbursable Costs.
Reimbursable costs for the nine months ended September 30, 2009 decreased $8.2
million, or 28%, over the comparable period in 2008 primarily due to lower
activity in our other segment.
Depreciation and Amortization.
Depreciation expense for the nine months ended September 30, 2009
increased $8.6 million, or 8%, over the comparable period in 2008. This increase
relates to capital additions primarily in our midwater and deepwater
segments.
General and Administrative.
General and administrative expenses for the nine months ended September
30, 2009 decreased $10.2 million, or 11%, over the comparable period in 2008.
The decrease was due to a $7.0 million reduction related to costs incurred in
the 2008 period for our ERP implementation and a reduction of $5.2 million in
expenses related to the ongoing investigation described under “—FCPA
Investigation” above. This decrease was partially offset by an increase of
$1.7 million in termination costs due to reductions in headcount, a $1.0 million
increase in costs related to the Seahawk spin-off and an increase of $1.3
million due to higher corporate facility rental expenses.
Gain on Sale of Assets, Net.
We had net gain on sales of assets of $0.5 million for the nine months
ended September 30, 2009 and net loss on sales of assets of $0.5 for the nine
months ended September 30, 2008, primarily due to the sale of scrap
equipment.
Interest Expense. Interest
expense for the nine months ended September 30, 2009 decreased $19.8 million
over the comparable period in 2008 primarily due to a $22.8 million increase in
capitalized interest offset by a net increase of $4.0 million in interest
expense as a result of the incremental interest expense associated
with the issuance of our 8 ½% Senior Notes in June 2009, which was partially
offset by debt reductions in the corresponding 2008 period.
Interest Income. Interest
income for the nine months ended September 30, 2009 decreased $12.5 million, or
83%, over the comparable period in 2008, due to the decrease in investment
income earned as a result of significantly lower investment yields
year-over-year. The decrease was also the result of maintaining lower average
cash balances due to the repayment of debt and payments made for newbuild
drillship construction projects, as compared to the comparable period in
2008.
Other Income (Expense), Net.
Other income, net for the nine months ended September 30, 2009 decreased
$19.0 million, or 121%, over the comparable period in 2008, due to an $11.4
million gain recorded in the first quarter of 2008 resulting from the sale of
our 30% interest in a joint venture that operated several land rigs in Oman. In
addition, we had a $3.6 million foreign exchange loss in 2008 as compared to a
foreign exchange gain of $5.2 million in the same period in 2009.
Income Taxes. Our
consolidated effective income tax rate for continuing operations for the nine
months ended September 30, 2009 was 16.6% compared with 20.1% for the nine
months ended September 30, 2008. The lower tax rate for the 2009 period was
principally the result of increased profitability in lower taxed jurisdictions
and tax benefits related to the finalization of certain tax
returns.
35
Liquidity
and Capital Resources
Our
objective in financing our business is to maintain both adequate financial
resources and access to additional liquidity. Our $320 million senior
unsecured revolving credit facility provides back-up liquidity to meet our
on-going working capital needs.
During
the nine months ended September 30, 2009, we used cash on hand and cash flows
generated from operations as our primary source of liquidity for funding our
working capital needs, debt repayment and capital expenditures. In
addition, on June 2, 2009 we issued $500 million aggregate principal amount of 8
½% senior notes due 2019. We expect to use the net proceeds from this
offering for general corporate purposes. We believe that our cash on hand,
including the net proceeds from the notes offering, cash flows from operations
and availability under our revolving credit facility will provide sufficient
liquidity through 2010 to fund our working capital needs, scheduled debt
repayments and anticipated capital expenditures, including progress payments for
our four drillship construction projects. In addition, we will continue to
pursue opportunities to expand or upgrade our fleet, which could result in
additional capital investment. We may also in the future elect to return capital
to our stockholders by share repurchases or the payment of
dividends.
We may
review from time to time possible expansion and acquisition opportunities
relating to our business, which may include the construction or acquisition of
rigs or acquisitions of other businesses in addition to those described in this
quarterly report. Any determination to construct or acquire additional rigs for
our fleet will be based on market conditions and opportunities existing at the
time, including the availability of long-term contracts with attractive dayrates
and the relative costs of building or acquiring new rigs with advanced
capabilities compared with the costs of retrofitting or converting existing rigs
to provide similar capabilities. The timing, size or success of any additional
acquisition or construction effort and the associated potential capital
commitments are unpredictable. We may seek to fund all or part of any such
efforts with proceeds from debt and/or equity issuances. Debt or equity
financing may not, however, be available to us at that time due to a variety of
events, including, among others, credit rating agency downgrades of our debt,
industry conditions, general economic conditions, market conditions and market
perceptions of us and our industry. In addition, we also review from time to
time the possible disposition of assets that we do not consider core to our
strategic long-term business plan.
As
discussed above, on August 24, 2009 we completed the spin-off of Seahawk to our
stockholders through a pro rata stock distribution. In connection
with the spin-off, we made a cash contribution to Seahawk of approximately $47.3
million to achieve a targeted working capital for Seahawk as of May 31, 2009 of
$85 million. We and Seahawk also agreed to indemnify each other for
certain liabilities that may arise or be incurred in the future attributable to
our respective businesses. In addition, pursuant to a tax support
agreement between us and Seahawk, we have agreed to guarantee or indemnify the
issuer of any surety bonds or other collateral issued for Seahawk’s account in
respect of certain Mexican tax assessments made prior to the spin-off
date. For additional information about the spin-off, please read
“—Recent Developments—Spin-off of Mat-Supported Jackup Business” and “—Loss of
Pride Wyoming” above
and Note 9 of the Notes to Unaudited Financial Statements in Item 1 of Part I of
this quarterly report.
36
Sources and Uses
of Cash for the Nine Months Ended September 30, 2009 Compared to the Nine
Months Ended September 30, 2008
Cash
flows provided by operating activities
Cash
flows provided by operations were $532.1 million for the nine months ended
September 30, 2009 compared with $432.4 million for the comparable period in
2008. The increase of $99.7 million was primarily due to a reduction in our
trade receivables partially offset by a reduction in cash flow from our
discontinued operations, which provided $18.8 million and $169.7 million of
operating cash flows for the nine months ended September 30, 2009 and 2008,
respectively.
Cash
flows used in investing activities
Cash
flows used in investing activities were $764.1 million for the nine months ended
September 30, 2009 compared with $461.6 million for the comparable period in
2008, an increase of $302.5 million. The increase is primarily
attributable to cash proceeds received on the sale of assets in
2008. In 2008, we received approximately $290.3 million of net
proceeds in connection with various assets sales. Purchases of property and
equipment totaled $698.6 million and $752.8 million for the nine months ended
September 30, 2009 and 2008, respectively. The decrease was primarily due a
reduction in scheduled shipyard project spending in 2009 over the comparable
period in 2008.
Cash
flows provided by financing activities
Cash
flows provided by financing activities were $477.0 million for the nine months
ended September 30, 2009 compared with cash flows used in financing activities
of $433.3 million for the comparable period in 2008, an increase of $910.3
million. The 2009 period included net proceeds of $492.4 million from the June
2009 notes offering, offset partially by $22.3 million of scheduled debt
repayments. In 2008, our net cash used for debt repayments included
$300 million to retire all of the outstanding 3¼% Convertible Senior Notes due
2033, $138.9 million to repay in full the outstanding amounts under our
drillship loan facility and $22.2 million in scheduled debt repayments. We also
received proceeds of $6.3 million and of $21.2 million from employee stock
transactions in the nine months ended September 30, 2009 and 2008,
respectively.
Working
Capital
As of
September 30, 2009, we had working capital of $909.7 million compared with
$849.6 million as of December 31, 2008. The increase in working capital is
primarily due to the June 2009 notes offering and a decrease in our trade
receivables of $110.0 million offset partially by expenditures incurred towards
the construction of our four ultra-deepwater drillships and a decrease in
accrued expenses and other current liabilities of $49.6 million.
Available
Credit Facilities
In
December 2008, we entered into a new $300 million unsecured revolving credit
agreement with a group of banks maturing in December 2011. In July 2009,
borrowing availability under the facility was increased to $320 million.
Borrowings under the credit facility are available to make investments,
acquisitions and capital expenditures, to repay and back-up commercial paper and
for other general corporate purposes. We may obtain up to $100 million of
letters of credit under the facility. The credit facility also has an accordion
feature that would, under certain circumstances, allow us to increase the
availability under the facility up to $600 million. Amounts drawn under the
credit facility bear interest at variable rates based on LIBOR plus a margin or
the alternative base rate. The interest rate margin applicable to LIBOR advances
varies based on our credit rating. As of September 30, 2009, there were no
outstanding borrowings or letters of credit outstanding under the
facility.
Other
Outstanding Debt
As of
September 30, 2009, in addition to our credit facility, we had the following
long-term debt, including current maturities, outstanding:
|
•
|
$500.0
million principal amount of 8 1/2% senior notes due
2019;
|
|
•
|
$500.0
million principal amount of 7 3/8% senior notes due 2014;
and
|
|
•
|
$205.0
million principal amount of notes guaranteed by the United States Maritime
Administration.
|
37
Other
Sources and Uses of Cash
We expect
our purchases of property and equipment for 2009, excluding our new drillship
commitments, to be approximately $360 million, of which we have spent
approximately $175 million in the first nine months of 2009. These purchases are
expected to be used primarily for various rig upgrades in connection with new
contracts as contracts expire during the year along with other sustaining
capital projects. With respect to our four ultra-deepwater drillships currently
under construction, we made payments of $437 million in the first nine months of
2009, with the total remaining costs estimated to be approximately $1.6 billion.
We anticipate making additional payments for the construction of these
drillships of approximately $235 million for the remainder of 2009,
approximately $580 million in 2010, and approximately $765 million in 2011. We
expect to fund our construction obligations with respect to these rigs through
available cash, cash flow from operations and borrowings under our revolving
credit facility.
We
anticipate making income tax payments of approximately $115 million to $125
million in 2009, of which $112 million has been paid through September 30,
2009.
We may
redeploy additional assets to more active regions if we have the opportunity to
do so on attractive terms. We frequently bid for or negotiate with customers
regarding multi-year contracts that could require significant capital
expenditures and mobilization costs. We expect to fund project opportunities
primarily through a combination of working capital, cash flow from operations
and borrowings under our revolving credit facility.
In
addition to the matters described in this “— Liquidity and Capital Resources”
section, please read “— Our Business” and “— Segment Review” for additional
matters that may have a material impact on our liquidity.
Letters
of Credit
We are
contingently liable as of September 30, 2009 in the aggregate amount of $369.2
million under certain performance, bid and custom bonds and letters of credit.
As of September 30, 2009, we had not been required to make any collateral
deposits with respect to these agreements.
Contractual
Obligations
For
additional information about our contractual obligations as of December 31,
2008, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources — Contractual
Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year
ended December 31, 2008. As of September 30, 2009, except with respect to the
issuance and sale in June 2009 of $500 million aggregate principal amount of our
8 ½% Senior Notes due 2019 and the rescheduling of $200 million of payments on
our drillship construction projects from 2010 to 2011, there were no material
changes to this disclosure regarding our contractual obligations made in the
annual report.
Accounting
Pronouncements
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Subtopic 810-10-65, Transition
Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests
inConsolidated
Financial Statements) establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. In addition, ASC Subtopic 810-10-65
requires expanded disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the parent’s owners
and the interests of the noncontrolling owners of a subsidiary. This subtopic is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We adopted the provisions of ASC
Subtopic 810-10-65 on January 1, 2009 but its adoption did not have a material
impact on our consolidated financial statements.
ASC Topic
805, Business
Combinations (formerly SFAS No. 141 (Revised 2007), Business Combinations and
FASB Staff Position (“FSP”) SFAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies), provides that all business combinations are required to
be accounted for at fair value under the acquisition method of accounting, but
changes the method of applying the acquisition method from previous principles
in a number of ways. Acquisition costs are no longer considered part
of the fair value of an acquisition and will generally be expensed as incurred,
noncontrolling interests are valued at fair value at the acquisition date,
in-process research and development is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, restructuring costs
associated with a business combination are generally expensed subsequent to the
acquisition date, and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. Contingent assets acquired and liabilities assumed in a
business combination are to be recognized at fair value if fair value can be
reasonably estimated during the measurement period. We adopted the changes
to the
provisions of ASC Topic 805 on January 1, 2009, with no material impact on our
consolidated financial statements.
38
ASC
Subtopic 820-10-65, Transition
Related to FASB Staff Position FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, provides additional
guidance for estimating fair value in accordance with ASC 820, Fair Value Measurements and
Disclosures, when the volume and level of activity for the asset or
liability have significantly decreased. This subtopic re-emphasizes
that regardless of market conditions the fair value measurement is an exit price
concept as defined in ASC 820. This subtopic clarifies and includes
additional factors to consider in determining whether there has been a
significant decrease in market activity for an asset or liability and provides
additional clarification on estimating fair value when the market activity for
an asset or liability has declined significantly. The scope of this
subtopic does not include assets and liabilities measured under level 1
inputs. ASC Subtopic 820-10-65 is applied prospectively to all fair
value measurements where appropriate and will be effective for interim and
annual periods ending after June 15, 2009. We adopted the provisions
of ASC Subtopic 820-10-65 effective April 1, 2009, with no material impact on
our consolidated financial statements.
ASC Topic
825-10-65, Transition Related
to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments amends ASC Topic 825, Financial Instruments, to
require publicly-traded companies, as defined in ASC Topic 270, Interim Reporting, to provide
disclosures on the fair value of financial instruments in interim financial
statements. ASC Topic 825-10-65 is effective for interim periods
ending after June 15, 2009. We adopted the new disclosure
requirements in our second quarter 2009 financial statements with no material
impact on our consolidated financial statements.
ASC
Subtopic 320-10-65, Transition
Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (formerly FSP SFAS 115-2 and SFAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments issued in April 2009), provides
transitional guidance for debt securities to make previous guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. Existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities was not amended by this
subtopic. This subtopic is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. We adopted the provisions of this subtopic effective April 1,
2009, with no material impact on our consolidated financial
statements.
ASC Topic
855, Subsequent Events
(formerly SFAS No. 165, Subsequent Events issued May
2009) establishes (i) the period after the balance sheet date during which
management shall evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (ii) the circumstances
under which an entity shall recognize events or transactions occurring after the
balance sheet date in its financial statements; and (iii) the disclosures that
an entity shall make about events or transactions that occurred after the
balance sheet date. This topic is effective for interim or annual financial
periods ending after June 15, 2009, and shall be applied prospectively. We
adopted the provisions of this topic effective April 1, 2009, with no material
impact on our consolidated financial statements.
ASC Topic
860, Transfers and
Servicing (formerly SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities-a replacement
of FASB Statement No. 125, as amended by SFAS No. 166, Accounting for Transfers of
Financial Assets – An Amendment of FASB Statement No. 140 issued in June
2009) amends prior principles to require more disclosure about transfers of
financial assets and the continuing exposure, retained by the transferor, to the
risks related to transferred financial assets, including securitization
transactions. It eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures. It also enhances information
reported to users of financial statements by providing greater transparency
about transfers of financial assets and an entity’s continuing involvement in
transferred financial assets. This topic will be effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. We will adopt this statement effective
January 1, 2010 and we do not expect the adoption to have a material impact on
our consolidated financial statements.
ASC
Subtopic 810-10-05, Consolidation – Variable Interest
Entities (formerly FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable
Interest Entities, as amended by SFAS No.
167, Amendments to FASB
Interpretation No. 46(R) in June 2009), defines how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. This topic
requires a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity’s financial statements. This statement will be
effective at the start of a reporting entity’s first fiscal year beginning after
November 15, 2009. Early application is not permitted. We will adopt this
statement prospectively effective January 1, 2010 and we do not expect the
adoption to have a material impact on our consolidated financial
statements.
39
ASC Topic
105, Generally Accepted
Accounting Principles (formerly SFAS No. 168, The FASB Accounting Standards
Codification and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162), issued in June 2009 became the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this statement, the codification
superseded all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
codification became nonauthoritative. This statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted this statement in the third quarter of 2009, with
no change to our consolidated financial statements other than changes in
reference to various authoritative accounting pronouncements in our consolidated
financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Fair Value Measurements and
Disclosures – Measuring Liabilities and Fair Value, amending Subtopic
820-10, Fair Value
Measurement, to provide guidance on the manner in which the fair value of
liabilities should be determined. This Update provides clarification that, in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of defined valuation techniques. The amendments in this Update
also clarify that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. We will adopt ASU No. 2009-05 in the fourth quarter of 2009, and do
not expect it will have a material impact on our consolidated financial
statements.
Forward-Looking
Statements
This
quarterly report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical fact,
included in this quarterly report that address activities, events or
developments that we expect, project, believe or anticipate will or may occur in
the future are forward-looking statements. These include such matters
as:
|
•
|
market
conditions, expansion and other development trends in the contract
drilling industry and the economy in
general;
|
|
•
|
our
ability to enter into new contracts for our rigs, commencement dates for
rigs and future utilization rates and contract rates for
rigs;
|
|
•
|
customer
requirements for drilling capacity and customer drilling
plans;
|
|
•
|
contract
backlog and the amounts expected to be realized within one
year;
|
|
•
|
future
capital expenditures and investments in the construction, acquisition,
refurbishment and repair of rigs (including the amount and nature thereof
and the timing of completion and delivery
thereof);
|
|
•
|
future
asset sales;
|
|
•
|
adequacy
of funds for capital expenditures, working capital and debt service
requirements;
|
|
•
|
future
income tax payments and the utilization of net operating loss and foreign
tax credit carryforwards;
|
|
•
|
expected
costs for salvage and removal of the Pride Wyoming and
expected insurance recoveries with respect to those
costs;
|
|
•
|
business
strategies;
|
|
•
|
expansion
and growth of operations;
|
|
•
|
future
exposure to currency devaluations or exchange rate
fluctuations;
|
|
•
|
expected
outcomes of legal, tax and administrative proceedings, including our
ongoing investigation into improper payments to foreign government
officials, and their expected effects on our financial position, results
of operations and cash flows;
|
|
•
|
future
operating results and financial condition;
and
|
|
•
|
the
effectiveness of our disclosure controls and procedures and internal
control over financial
reporting.
|
40
We have based these statements on our assumptions and analyses in light of our
experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including those described under “— FCPA Investigation” above,
in “Risk Factors” in Item 1A of Part II of this quarterly report and our
quarterly report on Form 10-Q for the quarter ended June 30, 2009 and Item 1A of
our annual report on Form 10-K for the year ended December 31, 2008 and the
following:
|
•
|
general
economic and business conditions, including conditions in the credit
markets;
|
|
•
|
prices
of crude oil and natural gas and industry expectations about future
prices;
|
|
•
|
ability
to adequately staff our rigs;
|
|
•
|
foreign
exchange controls and currency
fluctuations;
|
|
•
|
political
stability in the countries in which we
operate;
|
|
•
|
the
business opportunities (or lack thereof) that may be presented to and
pursued by us;
|
|
•
|
cancellation
or renegotiation of our drilling contracts or payment or other delays or
defaults by our customers;
|
|
•
|
unplanned
downtime and repairs on our rigs, particularly due to the age of some of
the rigs in our fleet;
|
|
•
|
changes
in laws or regulations; and
|
|
•
|
the
validity of the assumptions used in the design of our disclosure controls
and procedures.
|
Most of
these factors are beyond our control. We caution you that forward-looking
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in these
statements.
For
information regarding our exposure to interest rate risks, see “Quantitative and
Qualitative Disclosures About Market Risk” in Item 7A of our annual report on
Form 10-K for the year ended December 31, 2008. There have been no material
changes to the disclosure regarding our exposure to certain market risks made in
the annual report.
For
additional information regarding our long-term debt, see Note 4 of the Notes to
Unaudited Consolidated Financial Statements in Item 1 of Part I of this
quarterly report.
We
carried out an evaluation, under the supervision and with the participation of
our management, including our President and Chief Executive Officer and our
Senior Vice President and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934 as of the end of the period covered by this quarterly
report. Based upon that evaluation, our President and Chief Executive Officer
and our Senior Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures as of September 30, 2009 were effective with
respect to the recording, processing, summarizing and reporting, within the time
periods specified in the SEC’s rules and forms, of information required to be
disclosed by us in the reports that we file or submit under the Exchange
Act.
There
were no changes in our internal control over financial reporting that occurred
during the third quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
41
The
information set forth in Note 9 of the Notes to Unaudited Consolidated Financial
Statements in Item 1 of Part I of this quarterly report is incorporated by
reference in response to this item.
For
additional information about our risk factors, see Item 1A of our annual report
on Form 10-K for the year ended December 31, 2008.
In
connection with our spin-off of Seahawk, Seahawk agreed to indemnify us for
certain liabilities. However, there can be no assurance that the indemnity will
be sufficient to insure us against the full amount of such liabilities, or that
Seahawk’s ability to satisfy its indemnification obligations will not be
impaired in the future.
On August
24, 2009, we completed the spin-off of Seahawk, which holds the assets and
liabilities that were associated with our mat-supported jackup rig
business. Pursuant to a master separation agreement entered into in
connection with the spin-off, Seahawk agreed to indemnify us from certain
liabilities. However, third parties could seek to hold us responsible
for any of the liabilities for which Seahawk has agreed to be responsible, and
there can be no assurance that the indemnity from Seahawk will be sufficient to
protect us against the full amount of such liabilities, or that Seahawk will be
able to fully satisfy its indemnification obligations. Moreover, even
if we ultimately succeed in recovering from Seahawk any amounts for which we are
held liable, we may be temporarily required to bear these losses
ourselves. In some cases, we have agreed to advance expenses or to
guarantee obligations related to liabilities Seahawk has agreed to
retain. Each of these risks could adversely affect our results of
operations and financial condition.
The
following table presents information regarding our issuer repurchases of shares
of our common stock on a monthly basis during the third quarter of
2009:
Period
|
Total
Number of Shares Purchased
(1)
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of a Publicly Announced Plan (2)
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plan
(2)
|
|||
July
1-31, 2009
|
-
|
$ -
|
N/A
|
N/A
|
|||
August
1-31, 2009
|
37,362
|
$ 26.16
|
N/A
|
N/A
|
|||
September
1-30, 2009
|
-
|
$ -
|
N/A
|
N/A
|
|||
Total
|
37,362
|
$ 26.16
|
N/A
|
N/A
|
____________
(1)
|
Represents
the surrender of shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees under our stockholder-approved long-term incentive
plan.
|
(2)
|
We
did not have at any time during the quarter, and currently do not have, a
share repurchase program in place.
|
42
2.1
|
Master
Separation Agreement, dated as of August 4, 2009, between Pride
International, Inc. and Seahawk Drilling, Inc. (incorporated by reference
to Exhibit 2.1 to Pride's Current Report on Form 8-K filed with the SEC on
August 7, 2009, File No. 1-13289).
|
|
10.1
|
Tax
Sharing Agreement, dated as of August 4, 2009, between Pride
International, Inc. and Seahawk Drilling, Inc. (incorporated by reference
to Exhibit 10.1 to Pride's Current Report on Form 8-K filed with the SEC
on August 7, 2009, File No. 1-13289).
|
|
10.2†
|
Amended
and Restated Employment/Non-Competition/Confidentiality Agreement dated
December 31, 2008 between Pride and Imran Toufeeq (incorporated by
reference to Exhibit 10.1 to Pride's Current Report on Form 8-K filed with
the SEC on August 14, 2009, File No. 1-13289).
|
|
10.3†
|
Amended
SERP Participation Agreement dated December 31, 2008 between Pride
and Imran Toufeeq (incorporated by reference to Exhibit 10.2 to Pride's
Current Report on Form 8-K filed with the SEC on August 14, 2009, File No.
1-13289).
|
|
10.4*
|
Summary
of certain officer compensation arrangements.
|
|
12*
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
31.1*
|
Certification
of Chief Executive Officer of Pride pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of Chief Financial Officer of Pride pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32*
|
Certification
of the Chief Executive and Chief Financial Officer of Pride pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS**
|
XBRL
Instance Document
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema
|
|
101.LAB**
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation
Linkbase
|
____________
*
|
Filed
herewith.
|
†
|
Management
contract or compensatory plan or
arrangement.
|
**
|
Furnished
herewith.
|
***
|
Pride
and its subsidiaries are parties to several debt instruments that have not
been filed with the SEC under which the total amount of securities
authorized does not exceed 10% of the total assets of Pride and its
subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii) (A) of
Item 601(b) of Regulation S-K, Pride agrees to furnish a copy of such
instruments to the SEC upon
request.
|
43
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.
PRIDE
INTERNATIONAL, INC.
|
|||
By:
|
/s/
BRIAN C. VOEGELE
|
||
Brian
C. Voegele
|
|||
Senior
Vice President and Chief Financial Officer
|
|||
Date: November
2, 2009
|
|||
By:
|
/s/
LEONARD E. TRAVIS
|
||
Leonard
E. Travis
|
|||
Vice
President and Chief Accounting Officer
|
|||
Date: November
2, 2009
|
44
INDEX
TO EXHIBITS
2.1
|
Master
Separation Agreement, dated as of August 4, 2009, between Pride
International, Inc. and Seahawk Drilling, Inc. (incorporated by reference
to Exhibit 2.1 to Pride's Current Report on Form 8-K filed with the SEC on
August 7, 2009, File No. 1-13289).
|
|
10.1
|
Tax
Sharing Agreement, dated as of August 4, 2009, between Pride
International, Inc. and Seahawk Drilling, Inc. (incorporated by reference
to Exhibit 10.1 to Pride's Current Report on Form 8-K filed with the SEC
on August 7, 2009, File No. 1-13289).
|
|
10.2†
|
Amended
and Restated Employment/Non-Competition/Confidentiality Agreement dated
December 31, 2008 between Pride and Imran Toufeeq (incorporated by
reference to Exhibit 10.1 to Pride's Current Report on Form 8-K filed with
the SEC on August 14, 2009, File No. 1-13289).
|
|
10.3†
|
Amended
SERP Participation Agreement dated December 31, 2008 between Pride
and Imran Toufeeq (incorporated by reference to Exhibit 10.2 to Pride's
Current Report on Form 8-K filed with the SEC on August 14, 2009, File No.
1-13289).
|
|
10.4*
|
Summary
of certain officer compensation arrangements.
|
|
12*
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
31.1*
|
Certification
of Chief Executive Officer of Pride pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of Chief Financial Officer of Pride pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32*
|
Certification
of the Chief Executive and Chief Financial Officer of Pride pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS**
|
XBRL
Instance Document
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema
|
|
101.LAB**
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation
Linkbase
|
____________
*
|
Filed
herewith.
|
†
|
Management
contract or compensatory plan or
arrangement.
|
**
|
Furnished
herewith.
|
***
|
Pride
and its subsidiaries are parties to several debt instruments that have not
been filed with the SEC under which the total amount of securities
authorized does not exceed 10% of the total assets of Pride and its
subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii) (A) of
Item 601(b) of Regulation S-K, Pride agrees to furnish a copy of such
instruments to the SEC upon
request.
|
45