25-Feb-2011

Annual Report


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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Komodita Cena Změna %Změna
  Vepřové maso (USd/lb.) 57.525 0.525 00.92    
  FCOJ-A FUTURE (USd/lb.) 155.300 1.250 00.81    
  Kukuřice futures (USd/bu.) 360.750 2.750 00.77    
  Pšenice futures (USd/bu.) 825.000 4.500 00.55    
  Sojové boby (USd/bu.) 998.000 5.000 00.50    
  Kakao futures (USD/MT) 1884.000 9.000 00.48    
  LME ALUM HG FUTUR (USD/MT) 2478.750 10.250 00.42    
  Stříbro futures (USD/t oz.) 13.790 0.040 00.29    
  Hovězí maso (futures) (USd/lb.) 97.500 0.225 00.23    
  Zlato 100 OZ (USD/t oz.) 764.000 1.700 00.22    
  WTI CRUDE FUTURE (USD/bbl.) 87.550 0.150 00.17    
  Topný olej (futures) (USd/gal.) 232.110 0.220 00.09    
  GASOLINE RBOB FUT (USd/gal.) 214.860 0.200 00.09    
  Bavlna NO.2 (USd/lb.) 63.600 0.040 00.06    
  LME NICKEL FUTURE (USD/MT) 31568.000 -7.000 -00.02    
  Měď futures (USd/lb.) 358.500 -1.100 -00.31    
  Zemní plyn (futures) (USD/MMBtu) 7.406 -0.052 -00.70    
  Cukr #11 (USd/lb.) 10.050 -0.080 -00.79    
  Káva 'C' (USd/lb.) 128.000 -1.550 -01.20    
  FCOJ-A FUTURE (USd/lb.) 154.050 2.800 01.85    
  Káva 'C' (USd/lb.) 129.200 1.050 00.82    
  LME ALUM HG FUTUR (USD/MT) 2468.500 7.000 00.28    
  Pšenice futures (USd/bu.) 830.750 2.250 00.27    
  Vepřové maso (USd/lb.) 57.850 0.125 00.22    
  Bavlna NO.2 (USd/lb.) 63.500 0.050 00.08    
  Kakao futures (USD/MT) 1870.000 0.000 00.00    
  Hovězí maso (futures) (USd/lb.) 97.400 0.000 00.00    
  Zlato 100 OZ (USD/t oz.) 761.700 -0.300 -00.04    
  Zemní plyn (futures) (USD/MMBtu) 7.359 -0.008 -00.11    
  Stříbro futures (USD/t oz.) 13.635 -0.023 -00.17    
  GASOLINE RBOB FUT (USd/gal.) 216.600 -0.770 -00.35    
  Měď futures (USd/lb.) 362.600 -1.500 -00.41    
  LME NICKEL FUTURE (USD/MT) 31575.000 -155.000 -00.49    
  Cukr #11 (USd/lb.) 10.100 -0.050 -00.49    
  Sojové boby (USd/bu.) 990.750 -6.000 -00.60    
  WTI CRUDE FUTURE (USD/bbl.) 87.000 -0.610 -00.70    
  Topný olej (futures) (USd/gal.) 232.170 -1.700 -00.73    
  Kukuřice futures (USd/bu.) 357.250 -3.250 -00.90    
  FCOJ-A FUTURE (USd/lb.) 151.250 7.750 05.40    
  Stříbro futures (USD/t oz.) 13.960 0.105 00.76    
  Cukr #11 (USd/lb.) 10.020 0.070 00.70    
  Zlato 100 OZ (USD/t oz.) 767.200 5.000 00.66    
  GASOLINE RBOB FUT (USd/gal.) 217.040 1.290 00.60    
  WTI CRUDE FUTURE (USD/bbl.) 86.630 0.500 00.58    
  Sojové boby (USd/bu.) 1011.250 5.500 00.55    
  Topný olej (futures) (USd/gal.) 231.610 0.890 00.39    
  Vepřové maso (USd/lb.) 58.525 0.200 00.34    
  Káva 'C' (USd/lb.) 130.300 0.250 00.19    
  Bavlna NO.2 (USd/lb.) 63.390 0.070 00.11    
  Pšenice futures (USd/bu.) 834.000 0.500 00.06    
  Hovězí maso (futures) (USd/lb.) 98.000 0.025 00.03    
  Kakao futures (USD/MT) 1859.000 0.000 00.00    
  Zemní plyn (futures) (USD/MMBtu) 7.444 -0.001 -00.01    
  Kukuřice futures (USd/bu.) 361.750 -0.250 -00.07    
  Měď futures (USd/lb.) 368.300 -0.300 -00.08    
  LME NICKEL FUTURE (USD/MT) 31730.000 -65.000 -00.20    
  LME ALUM HG FUTUR (USD/MT) 2461.500 -14.000 -00.57    
  FCOJ-A FUTURE (USd/lb.) 143.500 6.950 05.09    
  Zemní plyn (futures) (USD/MMBtu) 7.173 0.199 02.85    
  LME ALUM HG FUTUR (USD/MT) 2453.500 34.500 01.43    
  Kukuřice futures (USd/bu.) 356.000 5.000 01.42    
  Stříbro futures (USD/t oz.) 14.020 0.117 00.84    
  Zlato 100 OZ (USD/t oz.) 759.900 6.100 00.81    
  Měď futures (USd/lb.) 368.150 2.900 00.79    
  GASOLINE RBOB FUT (USd/gal.) 209.350 0.840 00.40    
  Sojové boby (USd/bu.) 980.250 3.500 00.36    
  Cukr #11 (USd/lb.) 9.820 0.020 00.20    
  Topný olej (futures) (USd/gal.) 225.030 0.390 00.17    
  WTI CRUDE FUTURE (USD/bbl.) 83.740 0.050 00.06    
  Kakao futures (USD/MT) 1835.000 -3.000 -00.16    
  LME NICKEL FUTURE (USD/MT) 31665.000 -85.000 -00.27    
  Bavlna NO.2 (USd/lb.) 63.720 -0.260 -00.41    
  Hovězí maso (futures) (USd/lb.) 97.225 -0.550 -00.56    
  Pšenice futures (USd/bu.) 847.000 -10.500 -01.22    
  Káva 'C' (USd/lb.) 136.600 -2.700 -01.94    
  Vepřové maso (USd/lb.) 58.275 -2.250 -03.72    
  LME NICKEL FUTURE (USD/MT) 31750.000 585.000 01.88    
  Vepřové maso (USd/lb.) 61.050 0.525 00.87    
  Měď futures (USd/lb.) 368.650 1.750 00.48    
  Hovězí maso (futures) (USd/lb.) 97.900 0.125 00.13    
  LME ALUM HG FUTUR (USD/MT) 2419.000 3.000 00.12    
  Cukr #11 (USd/lb.) 9.810 0.000 00.00    
  Pšenice futures (USd/bu.) 883.000 0.000 00.00    
  Topný olej (futures) (USd/gal.) 224.620 -0.110 -00.05    
  WTI CRUDE FUTURE (USD/bbl.) 83.030 -0.050 -00.06    
  GASOLINE RBOB FUT (USd/gal.) 206.500 -0.160 -00.08    
  Zemní plyn (futures) (USD/MMBtu) 6.870 -0.006 -00.09    
  Bavlna NO.2 (USd/lb.) 63.100 -0.150 -00.24    
  Kakao futures (USD/MT) 1850.000 -5.000 -00.27    
  Kukuřice futures (USd/bu.) 342.750 -1.000 -00.29    
  Káva 'C' (USd/lb.) 137.500 -0.750 -00.54    
  Zlato 100 OZ (USD/t oz.) 752.300 -4.400 -00.58    
  Sojové boby (USd/bu.) 975.250 -6.250 -00.64    
  Stříbro futures (USD/t oz.) 13.855 -0.130 -00.93    
  FCOJ-A FUTURE (USd/lb.) 137.400 -3.700 -02.62    
  FCOJ-A FUTURE (USd/lb.) 141.100 4.050 02.96    
  LME NICKEL FUTURE (USD/MT) 31165.000 790.000 02.60    
  LME ALUM HG FUTUR (USD/MT) 2416.000 41.750 01.76    
  Káva 'C' (USd/lb.) 134.600 1.200 00.90    
  Stříbro futures (USD/t oz.) 13.745 0.077 00.56    
  Zemní plyn (futures) (USD/MMBtu) 7.049 0.039 00.56    
  Zlato 100 OZ (USD/t oz.) 749.600 3.600 00.48    
  Cukr #11 (USd/lb.) 9.780 0.040 00.41    
  Pšenice futures (USd/bu.) 856.250 3.250 00.38    
  WTI CRUDE FUTURE (USD/bbl.) 81.500 0.200 00.25    
  Sojové boby (USd/bu.) 969.750 1.500 00.15    
  Topný olej (futures) (USd/gal.) 222.050 0.330 00.15    
  Kukuřice futures (USd/bu.) 347.750 0.500 00.14    
  GASOLINE RBOB FUT (USd/gal.) 203.650 0.290 00.14    
  Bavlna NO.2 (USd/lb.) 64.240 0.030 00.05    
  Hovězí maso (futures) (USd/lb.) 96.600 -0.025 -00.03    
  Vepřové maso (USd/lb.) 59.750 -0.025 -00.04    
  Kakao futures (USD/MT) 1833.000 -2.000 -00.11    
  Měď futures (USd/lb.) 368.800 -0.600 -00.16    
  LME NICKEL FUTURE (USD/MT) 30375.000 540.000 01.81    
  LME ALUM HG FUTUR (USD/MT) 2374.250 36.250 01.55    
  Kukuřice futures (USd/bu.) 345.750 3.250 00.95    
  Pšenice futures (USd/bu.) 852.250 6.750 00.80    
  Sojové boby (USd/bu.) 957.500 7.250 00.76    
  Stříbro futures (USD/t oz.) 13.645 0.062 00.46    
  Zlato 100 OZ (USD/t oz.) 746.300 3.200 00.43    
  Měď futures (USd/lb.) 363.200 1.450 00.40    
  Kakao futures (USD/MT) 1823.000 7.000 00.39    
  Cukr #11 (USd/lb.) 9.940 0.030 00.30    
  Vepřové maso (USd/lb.) 59.800 0.075 00.13    
  Hovězí maso (futures) (USd/lb.) 96.600 0.100 00.10    
  Káva 'C' (USd/lb.) 133.750 0.000 00.00    
  FCOJ-A FUTURE (USd/lb.) 137.050 0.000 00.00    
  GASOLINE RBOB FUT (USd/gal.) 202.000 -0.020 -00.01    
  Topný olej (futures) (USd/gal.) 218.500 -0.030 -00.01    
  Zemní plyn (futures) (USD/MMBtu) 6.861 -0.002 -00.03    
  WTI CRUDE FUTURE (USD/bbl.) 80.220 -0.040 -00.05    
  Bavlna NO.2 (USd/lb.) 62.500 -0.480 -00.76    
  Sojové boby (USd/bu.) 931.000 5.500 00.59    
  Hovězí maso (futures) (USd/lb.) 96.700 0.450 00.47    
  Vepřové maso (USd/lb.) 59.700 0.225 00.38    
  Kukuřice futures (USd/bu.) 340.750 1.000 00.29    
  Cukr #11 (USd/lb.) 9.770 0.020 00.21    
  Zemní plyn (futures) (USD/MMBtu) 6.855 0.009 00.13    
  Bavlna NO.2 (USd/lb.) 62.420 -0.010 -00.02    
  FCOJ-A FUTURE (USd/lb.) 137.100 -0.050 -00.04    
  Topný olej (futures) (USd/gal.) 215.740 -0.220 -00.10    
  Kakao futures (USD/MT) 1814.000 -2.000 -00.11    
  WTI CRUDE FUTURE (USD/bbl.) 78.840 -0.180 -00.23    
  Zlato 100 OZ (USD/t oz.) 736.800 -1.900 -00.26    
  GASOLINE RBOB FUT (USd/gal.) 199.410 -0.610 -00.30    
  Káva 'C' (USd/lb.) 138.200 -0.550 -00.40    
  Stříbro futures (USD/t oz.) 13.305 -0.055 -00.41    
  Měď futures (USd/lb.) 359.400 -1.900 -00.53    
  LME ALUM HG FUTUR (USD/MT) 2338.000 -45.500 -01.91    
  Pšenice futures (USd/bu.) 839.250 -20.750 -02.41    
  LME NICKEL FUTURE (USD/MT) 29835.000 -1290.000 -04.14    
  LME NICKEL FUTURE (USD/MT) 31125.000 600.000 01.97    
  Káva 'C' (USd/lb.) 139.300 2.300 01.68    
  LME ALUM HG FUTUR (USD/MT) 2383.500 9.250 00.39    
  Vepřové maso (USd/lb.) 60.300 0.225 00.37    
  Bavlna NO.2 (USd/lb.) 63.370 0.150 00.24    
  Stříbro futures (USD/t oz.) 13.490 0.000 00.00    
  FCOJ-A FUTURE (USd/lb.) 137.150 0.000 00.00    
  Zlato 100 OZ (USD/t oz.) 746.100 -1.100 -00.15    
  Cukr #11 (USd/lb.) 9.760 -0.030 -00.31    
  Sojové boby (USd/bu.) 937.500 -3.000 -00.32    
  Topný olej (futures) (USd/gal.) 221.410 -0.940 -00.42    
  GASOLINE RBOB FUT (USd/gal.) 204.000 -0.930 -00.45    
  WTI CRUDE FUTURE (USD/bbl.) 80.760 -0.460 -00.57    
  Kukuřice futures (USd/bu.) 340.000 -2.250 -00.66    
  Kakao futures (USD/MT) 1844.000 -14.000 -00.75    
  Měď futures (USd/lb.) 369.100 -3.450 -00.93    
  Zemní plyn (futures) (USD/MMBtu) 6.984 -0.089 -01.26    
  Pšenice futures (USd/bu.) 876.250 -13.750 -01.54    
  Hovězí maso (futures) (USd/lb.) 96.125 -1.725 -01.76    
  FCOJ-A FUTURE (USd/lb.) 137.150 2.850 02.12    
  Cukr #11 (USd/lb.) 9.840 0.050 00.51    
  Měď futures (USd/lb.) 375.550 1.750 00.47    
  Vepřové maso (USd/lb.) 60.175 0.100 00.17    
  Kakao futures (USD/MT) 1877.000 2.000 00.11    
  GASOLINE RBOB FUT (USd/gal.) 205.380 0.160 00.08    
  Stříbro futures (USD/t oz.) 13.510 0.010 00.07    
  Pšenice futures (USd/bu.) 906.500 0.500 00.06    
  Bavlna NO.2 (USd/lb.) 63.490 0.000 00.00    
  Káva 'C' (USd/lb.) 135.150 -0.050 -00.04    
  Sojové boby (USd/bu.) 953.000 -1.250 -00.13    
  Hovězí maso (futures) (USd/lb.) 97.700 -0.150 -00.15    
  Topný olej (futures) (USd/gal.) 222.650 -0.480 -00.22    
  WTI CRUDE FUTURE (USD/bbl.) 81.250 -0.190 -00.23    
  Zlato 100 OZ (USD/t oz.) 741.800 -2.000 -00.27    
  Kukuřice futures (USd/bu.) 341.250 -1.000 -00.29    
  Zemní plyn (futures) (USD/MMBtu) 7.343 -0.069 -00.93    
  LME NICKEL FUTURE (USD/MT) 30525.000 -730.000 -02.34    
  LME ALUM HG FUTUR (USD/MT) 2374.250 -58.750 -02.41    
  LME NICKEL FUTURE (USD/MT) 31255.000 820.000 02.69    
  FCOJ-A FUTURE (USd/lb.) 134.300 1.800 01.36    
  Pšenice futures (USd/bu.) 939.000 12.000 01.29    
  Sojové boby (USd/bu.) 957.000 6.000 00.63    
  Vepřové maso (USd/lb.) 60.950 0.350 00.58    
  Kakao futures (USD/MT) 1886.000 10.000 00.53    
  Kukuřice futures (USd/bu.) 346.000 1.500 00.44    
  Bavlna NO.2 (USd/lb.) 63.520 0.090 00.14    
  GASOLINE RBOB FUT (USd/gal.) 199.750 0.160 00.08    
  Káva 'C' (USd/lb.) 135.900 0.050 00.04    
  Hovězí maso (futures) (USd/lb.) 97.400 0.000 00.00    
  Topný olej (futures) (USd/gal.) 217.720 -0.150 -00.07    
  Zemní plyn (futures) (USD/MMBtu) 7.267 -0.010 -00.14    
  Cukr #11 (USd/lb.) 9.820 -0.020 -00.20    
  LME ALUM HG FUTUR (USD/MT) 2433.000 -5.250 -00.22    
  Měď futures (USd/lb.) 375.050 -1.300 -00.35    
  WTI CRUDE FUTURE (USD/bbl.) 79.650 -0.290 -00.36    
  Zlato 100 OZ (USD/t oz.) 731.300 -4.400 -00.60    
  Stříbro futures (USD/t oz.) 13.325 -0.145 -01.08    
  FCOJ-A FUTURE (USd/lb.) 132.500 3.200 02.47    
  LME NICKEL FUTURE (USD/MT) 30435.000 280.000 00.93    
  Cukr #11 (USd/lb.) 10.090 0.070 00.70    
   
 
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