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. Our current fleet of 46 offshore drilling
rigs consists of 32 semisubmersibles, 13 jack-ups and one drillship.
Overview
Industry Conditions
On October 12, 2010, the U.S. government lifted the ban on certain drilling
activities in the GOM. All drilling in the GOM is now subject to compliance with
enhanced safety requirements set forth in Notices to Lessees, or NTL, 2010-N05
and 2010-N06, both of which were implemented during the drilling ban.
Additionally, all drilling in the GOM is required to comply with the Interim
Final Rule to Enhance Safety Measures for Energy Development on the Outer
Continental Shelf (Drilling Safety Rule) and the Workplace Safety Rule on Safety
and Environmental Management Systems, which have become final, as well as NTL
2010-N10 (known as the Compliance and Review NTL). We continue to evaluate these
new measures to ensure that our rigs and equipment are in full compliance, where
applicable. Additional requirements could be forthcoming based on further
recommendations by regulatory agencies investigating the Macondo incident. We
are not able to predict the likelihood, nature or extent of additional
rulemaking. Nor are we able to predict when the Bureau of Ocean Energy
Management, Regulation and Enforcement, or BOEMRE, will issue drilling permits
to our customers. We are not able to predict the future impact of these events
on our operations. Even with the drilling ban lifted, certain deepwater drilling
activities remain suspended until the BOEMRE resumes its regular permitting of
those activities.
It has been reported that the industry currently has 36 floating rigs in the
GOM that have been impacted by the moratorium and that five floating rigs have
left the GOM since the imposition of the moratorium, two of which rigs were
ours. As of the date of this report, we have two semisubmersible units under
contract in the GOM, in addition to the Ocean Monarch, whose contract the
operator has sought to terminate as discussed below, as well as two jack-up
units, one of which is under contract. Given the continuing uncertainty with
respect to drilling activity in the GOM, our customers may seek to move
additional rigs to locations outside of the GOM or perform activities which are
allowed under the enhanced safety requirements. In June 2010, one of our
customers asserted force majeure as a basis for its termination of the drilling
contract for the Ocean Monarch, which had a remaining term of approximately
36 months. The operator has also filed suit against us in U.S. District Court in
Houston seeking a declaratory judgment that its termination of the drilling
contract is warranted under the contract. We do not believe the events cited by
the operator come within the definition of force majeure under the drilling
contract, and we do not believe that the operator has the right to terminate the
drilling contract on this basis. Although we cannot predict with certainty the
results of any such litigation, and there can be no assurance as to its ultimate
outcome, we intend to vigorously defend this litigation and challenge the
operator's attempt to terminate the drilling contract.
We are continuing to actively seek international opportunities to keep our
rigs employed. However, we can provide no assurance that we will be successful
in our efforts to employ our remaining impacted rigs in the GOM in the near
term. In addition, given the ongoing uncertainty in the GOM with respect to
drilling activity and other industry factors, we have cold stacked two
intermediate floaters and four jack-up rigs in the GOM.
While dayrates we receive for new contracts are no longer at the peak levels
achieved at the height of the most recent up-cycle, improving oil prices, which
had climbed to approximately $90 per barrel by the end of 2010, appear to be
supporting demand for our equipment. As a result, dayrates for our international
floater units appear to have stabilized, though demand for our services has not
risen sufficiently to provide significant pricing power on new contracts.
Additionally, the continuing regulatory uncertainty in the GOM could cause
Diamond Offshore or others to move additional rigs out of the GOM to
international locations. If we, or others, move a large number of additional
rigs out of the GOM to international locations, the increased supply of
available rigs entering the international market, coupled with un-contracted
new-build rigs scheduled for delivery between now and the end of 2011, could
create downward pressure on dayrates unless demand improves sufficiently to
absorb the new supply.
Since September 30, 2010 through the date of this report, we have entered
into 17 new drilling contracts totaling approximately $457 million in backlog
and ranging in duration from one well to one year. As of February 1, 2011, our
contract backlog was approximately $6.6 billion, of which our contracts in the
GOM (excluding amounts related
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to the contract for the Ocean Monarch discussed above) represented approximately
$141.0 million, or 2%, of our total contract backlog.
Floaters
Our intermediate and high-specification floater rigs, both domestic and
international, accounted for approximately 89% of our revenue during 2010.
Approximately 74% of the time on our intermediate and high-specification floater
rigs is committed for 2011. Additionally, 51% of the time on our floating rigs
is committed in 2012.
International Jack-ups
During the fourth quarter of 2010, demand for our international jack-ups
remained weak but stable. However, the high-specification new-build equipment
coming to market is enjoying a significantly higher utilization rate than older
existing equipment, and the oversupply of jack-up rigs could have an
increasingly negative impact on the international sector throughout 2011 and
beyond.
U.S. Gulf of Mexico Jack-ups
The jack-up market in the GOM has been negatively impacted by the slow
issuance of jack-up permits subsequent to the lifting of the drilling
moratorium, as well as the impact of lower natural gas prices on both demand and
dayrates. Our two remaining jack-ups in the GOM are largely working under
short-term contracts and could experience significant downtime unless permitting
activity increases. Absent an increase in permitting activity and a sustained
improvement in natural gas prices, weakness in the GOM jack-up market is likely
to continue in 2011, with the possibility of additional rigs being cold-stacked
by us and others in the industry.
Egyptian Operations
We currently have one high-specification floater and two jack-up rigs
contracted offshore Egypt with an aggregate net book value of $269.9 million, or
approximately 6% of our total operating assets at December 31, 2010. Although
these rigs have continued to work throughout the recent political unrest in
Egypt, there have been, and in the future there may be other, disruptions to the
support networks within Egypt, including the banking institutions. At
February 1, 2011, our contract drilling backlog related to our drilling
operations offshore Egypt was approximately $60.0 million, or 2% of our total
contract drilling backlog, for 2011. Our customers may attempt to assert force
majeure under the agreements under which these rigs are operating. As of the
date of this report, we have not received any force majeure assertions with
respect to our Egyptian operations.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of February 1,
2011, October 18, 2010 (the date reported in our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2010) and February 1, 2010 (the date
reported in our Annual Report on Form 10-K for the year ended December 31,
2009). 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.
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