Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with our Consolidated
Financial Statements (including the Notes thereto) in Item 8 of this report.
We provide contract drilling services to the energy industry around the globe
and are a leader in offshore drilling with a fleet of 45 offshore drilling rigs.
Our fleet currently consists of 30 semisubmersibles, 14 jack-ups and one
drillship.
Overview
Industry Conditions
The global economic recession significantly reduced energy demand in the
fourth quarter of 2008 and into the first quarter of 2009. As a result, crude
oil prices have fallen from a 2008 mid-summer high of $146 per barrel to as low
as $34 per barrel in mid-February 2009, and remain volatile. With the falling
energy prices, project economics for our customers have deteriorated, 2009
exploration budgets have been trimmed, and demand and pricing for available
drilling rigs is declining. Our contract backlog should help mitigate the impact
of the current market on us; however, a prolonged decline in commodity prices
and the global economy could have a negative impact on us. Possible negative
impacts, among others, could include customer credit problems, customers seeking
bankruptcy protection, customers attempting to renegotiate or terminate
contracts, a further slowing in the pace of new contracting activity, additional
declines in dayrates for new contracts, declines in utilization and the stacking
of idle equipment.
Floaters
The majority of our intermediate and high-specification floater rigs are
largely contracted for the remainder of 2009. Additionally, contracts for 71% of
our floating rigs extend at least through 2010, with 9% of our floating units
having contracts extending into the 2014-2015 timeframe. However, during the
first quarter of 2009 a customer employing our semisubmersible Ocean Guardian in
the United Kingdom, or U.K., sector of the North Sea entered into administration
under U.K. law (a U.K. insolvency proceeding similar to U.S. Chapter 11
bankruptcy reorganization but with an external manager, typically an accountant,
running the company). The rig, which was operating under a contract that extends
until September 2011, is currently on standby and is not earning revenue. In the
U.S. Gulf of Mexico, or GOM, during the fourth quarter of 2008, a customer
breached its contract with us and canceled the second well of a two-well project
for the semisubmersible Ocean Victory. We were able to re-contract the rig,
albeit at a lower dayrate, to fill the resulting short gap until a previously
committed job is scheduled to begin. We are continuing to pursue appropriate
contractual remedies with both customers.
International Jack-ups
The industry's jack-up market is divided between an international sector and
a U.S. sector, with the international sector generally characterized by
contracts of longer duration and higher prices, compared to the generally
shorter term and lower priced domestic sector. However, in 2009 to the date of
this report, demand and dayrates have continued to soften internationally. Based
on analyst reports to the effect that less than 20% of the industry's new-build
jack-up order book is under contract, it is possible that an oversupply of
jack-up rigs will have an increasingly negative impact on the international
sector during 2009 and beyond.
U.S. Gulf of Mexico Jack-ups
In the domestic jack-up sector, rapidly declining product prices have
negatively impacted both demand and dayrates. In response, where possible we are
continuing to seek to move units out of the GOM and into markets with generally
longer contract duration and higher prices. In that regard, we were low bidder
for a 476-day job for the 300-ft. Ocean Summit and for an 849-day extension for
the 300-ft. Ocean Nugget. Both bids are for work offshore Mexico and remain
subject to final approvals. Absent improving product prices, weakness in the GOM
is likely to continue in 2009, with an increasing number of rigs being
cold-stacked by the industry in an effort to help bring equipment supply and
demand into equilibrium.
Table of Contents
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of February 5,
2009, October 23, 2008 (the date reported in our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2008) and February 7, 2008 (the date
reported in our Annual Report on Form 10-K for the year ended December 31, 2007)
and for the 2008 periods includes both firm commitments (typically represented
by signed contracts), as well as previously-disclosed letters of intent, or
LOIs, where indicated. An LOI is subject to customary conditions, including the
execution of a definitive agreement, and as such may not result in a binding
contract. Contract drilling backlog is calculated by multiplying the contracted
operating dayrate by the firm contract period and adding one-half of any
potential rig performance bonuses. Our calculation also assumes full utilization
of our drilling equipment for the contract period (excluding scheduled shipyard
and survey days); however, the amount of actual revenue earned and the actual
periods during which revenues are earned will be different than the amounts and
periods shown in the tables below due to various factors. Utilization rates,
which generally approach 95-98% during contracted periods, can be adversely
impacted by downtime due to various operating factors including, but not limited
to, weather conditions and unscheduled repairs and maintenance. Contract
drilling backlog excludes revenues for mobilization, demobilization, contract
preparation and customer reimbursables. No revenue is generally earned during
periods of downtime for regulatory surveys. Changes in our contract drilling
backlog between periods are a function of the performance of work on term
contracts, as well as the extension or modification of existing term contracts
and the execution of additional contracts.
