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 fleet of 47 offshore drilling rigs
consists of 32 semisubmersibles, 14 jack-ups and one drillship.
Overview
Industry Conditions
The global economy remained weak in the fourth quarter of 2009 and into the
first quarter of 2010 and energy prices continued to be volatile. Given the
unpredictable economic environment, the demand for our services and the dayrates
we were able to command for new contracts softened. This volatility and
uncertainty could continue until the global economy improves. Absent global
economic improvement the decline in drilling activity could be further
exacerbated by the influx of new-build rigs over the next several years,
particularly in regard to jack-up units.
We have experienced negative effects of the current market such as customer
credit problems, customers attempting to renegotiate or terminate contracts, one
customer seeking bankruptcy protection, a further slowing in the pace of new
contracting activity, declines in dayrates for new contracts, declines in
utilization and the stacking of idle equipment. Nevertheless, during 2009, we
added new commitments to our contract backlog. We entered 2010 with a contract
backlog approaching $8.5 billion, which we expect to help mitigate the impact of
the current market on us in 2010.
Floaters
Approximately 81% of the time on our intermediate and high-specification
floater rigs is committed for 2010. Additionally, 55% of the time on our
floating rigs is committed in 2011.
International Jack-ups
The industry's jack-up market is divided between an international sector and
a U.S. sector, with the international sector historically characterized by
contracts of longer duration and higher prices, compared to the generally
shorter term and lower priced domestic sector. However, in 2009 demand and
dayrates softened internationally as existing rigs rolled off contract and met
competition from un-contracted new-build jack-ups that came to market. It is
expected that this oversupply of jack-up rigs will have an increasingly negative
impact on the international sector during 2010 and beyond.
GOM Jack-ups
In the domestic jack-up sector, lower natural gas prices have negatively
impacted both demand and dayrates. In response, to reduce costs, we have
cold-stacked three of our lower-end jack-up units, and they are not being
actively marketed. Our four remaining higher-specification jack-ups in the GOM
are largely working under short-term contracts. Absent a sustained improvement
in energy prices, weakness in the GOM jack-up market is likely to continue in
2010, with the possibility of additional rigs being cold-stacked by the industry
in an effort to help bring equipment supply and demand into equilibrium.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of February 1,
2010, October 22, 2009 (the date reported in our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009) and February 5, 2009 (the date
reported in our Annual Report on Form 10-K for the year ended December 31,
2008). The October 2009 period includes both firm commitments (typically
represented by signed contracts), as well as previously-disclosed letters of
intent, or LOIs, where indicated. An LOI is subject to customary conditions,
including the execution of a definitive agreement, and as such may not result in
a binding contract. Contract drilling backlog is calculated by multiplying the
contracted operating dayrate by the firm contract period and adding one-half of
any potential rig performance bonuses. Our calculation also assumes full
utilization of our drilling equipment for the contract period (excluding
scheduled shipyard and survey days); however, the amount of actual revenue
earned and the actual
Table of Contents
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.
