| ENSCO INTERNATIONAL INC "e Item 1A Risk Factors "e below and elsewhere herein |
| Business Overview and Operating Strategy ENSCO International Incorporated and subsidiaries ( "e ENSCO "e or the "e Company "e ) is an international offshore contract drilling company |
| As of February 15, 2006, the Companyapstas complement of offshore drilling rigs includes 43 jackup rigs, one ultra-deepwater semisubmersible rig, one platform rig and one barge rig |
| Additionally, the Company has two ultra-deepwater semisubmersible rigs and one ultra-high specification jackup rig under construction |
| The Companyapstas offshore contract drilling operations are integral to the exploration, development and production of oil and natural gas and the Company is one of the leading providers of offshore contract drilling services to the international oil and gas industry |
| The Companyapstas operations are concentrated in the geographic regions of North America, Europe/Africa, Asia Pacific (which includes Asia, the Middle East, Australia, and New Zealand) and South America/Caribbean |
| Since 1987, the Company has pursued a strategy of building its fleet of offshore drilling rigs through corporate acquisitions, rig acquisitions and new rig construction |
| The Company acquired Penrod Holding Corporation in 1993, Dual Drilling Company in 1996 and Chiles Offshore Inc |
| From 1994 to 1999, the Company acquired five jackup rigs and completed construction of seven barge rigs |
| In 2000, the Company completed construction of ENSCO 101, a harsh environment jackup rig, and ENSCO 7500, a dynamically positioned ultra-deepwater semisubmersible rig capable of drilling in water depths up to 8cmam000 feet |
| During 2004 and 2005, the Company purchased a harsh environment jackup rig, ENSCO 102, and an ultra-high specification jackup rig, ENSCO 106 |
| Both rigs were constructed through joint ventures with Keppel FELS Limited ( "e KFELS "e ), a major international shipyard |
| In January 2006, the Company accepted delivery of ENSCO 107, an ultra-high specification jackup rig that is scheduled to commence drilling operations in March 2006 |
| The Company also entered into agreements with KFELS for the construction of ENSCO 108, ENSCO 8500 and ENSCO 8501 |
| ENSCO 108, an ultra-high specification jackup rig, is scheduled for delivery in the second quarter of 2007 |
| ENSCO 8500 and ENSCO 8501, dynamically positioned ultra-deepwater semisubmersible rigs capable of drilling in up to 8cmam500 feet of water which can be readily upgraded to 10cmam000 feet water-depth capability if required, are scheduled for delivery during the second quarters of 2008 and 2009, respectively |
| The ENSCO 8500 and ENSCO 8501 are subject to long-term drilling contracts of four years and three and one half years, respectively |
| With the Companyapstas primary focus on its jackup rig and ultra-deepwater semisubmersible rig operations, it has de-emphasized those operations and assets which it considers to be non-core or that do not meet the Companyapstas standards for financial performance |
| Accordingly, the Company sold its marine transportation fleet, two platform rigs and two barge rigs in 2003, sold one jackup rig and two platform rigs to KFELS in 2004 in connection with the execution of the ENSCO 107 construction agreement, and sold five barge rigs and one platform rig in 2005 |
| The Company was formed as a Texas corporation in 1975 and was reincorporated in Delaware in 1987 |
| The Companyapstas principal office is located at 500 North Akard Street, Suite 4300, Dallas, Texas, 75201-3331, and its telephone number is (214) 397-3000 |
| 3 _________________________________________________________________ [54]Table of Contents Contract Drilling Operations The Companyapstas operations consist of one reportable segment: contract drilling services |
| Drilling operations are conducted by a number of subsidiaries (the "e Subsidiaries "e ), substantially all of which are wholly-owned |
| The Subsidiaries engage in the drilling of offshore oil and gas wells in domestic and international markets under contracts with major international, government-owned and independent oil and gas companies |
| As used herein, the term "e Company "e includes the Subsidiaries when and as the context requires |
| As of February 15, 2006, the Company owns and operates 43 jackup rigs, one ultra-deepwater semisubmersible rig, one platform rig and one barge rig |
| Of the 43 jackup rigs, presently 17 are located in the Gulf of Mexico, 17 are located in the Asia Pacific region, eight are located in the North Sea and one is located offshore Africa |
| The barge rig is located in Indonesia and the platform and ultra-deepwater semisubmersible rigs are located in the Gulf of Mexico |
| The Companyapstas contract drilling services and equipment are used to drill and complete oil and gas wells |
| Demand for the Companyapstas drilling services is based upon many factors which are beyond the control of the Company, including: • market price of oil and gas and the stability thereof, • production levels and related activities of the Organization of Petroleum Exporting Countries ( "e OPEC "e ) and other oil and gas producers, • regional supply and demand for natural gas, • worldwide expenditures for offshore oil and gas drilling, • level of worldwide economic activity, • long-term effect of worldwide energy conservation measures, and • the development and use of alternatives to hydrocarbon-based energy sources |
| The drilling services provided by the Company are conducted on a "e day rate "e contract basis |
| Under day rate contracts, the Company provides the drilling rig and rig crews and receives a fixed amount per day for drilling the well, and the customer bears substantially all of the ancillary costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well |
| The customer may pay all or a portion of the cost of moving the Companyapstas equipment and personnel to the well site and, in the case of platform rigs, the cost of assembling and dismantling the equipment |
| The Company does not provide "e turnkey "e or other risk-based drilling services |
| Financial information regarding the Companyapstas operating segment and geographic regions is presented in Note 12 to the Companyapstas Consolidated Financial Statements included in "e Item 8 |
| Financial Statements and Supplementary Data "e |
| Additional financial information regarding the Companyapstas operating segment is presented in "e Item 7 |
| 4 _________________________________________________________________ [55]Table of Contents Backlog Information Durations of the Companyapstas drilling contracts depend on several factors, including customer requirements, current and expected future market conditions, location of rigs and contract operations, and type and availability of rigs |
| Historically, jackup rig drilling contracts in the Gulf of Mexico and the North Sea have typically been short-term while the Company entered a majority of its remaining rig fleet into longer-term contracts with terms typically of one year duration or longer |
| Recently executed contracts in the Companyapstas major geographical markets are generally of greater duration than the historical averages |
| In addition, many customers have begun to contract rigs well in advance of the dates rigs are needed, which has resulted in a substantial increase in the Companyapstas backlog |
| The current and historic backlog of business for the Companyapstas contract drilling services as of February 1, 2006 and 2005 were dlra2cmam477dtta9 million and dlra814dtta4 million, respectively |
| The increase in backlog from the prior year is due primarily to increased day rates, long-term contracts associated with rigs under construction, increased contract durations and the aforementioned advance contracting by many of the Companyapstas customers |
| Approximately dlra1cmam418dtta6 million of the backlog for contract drilling services as of February 1, 2006, is expected to be realized after December 31, 2006, including dlra853dtta4 million associated with rigs under construction |
| The majority of the backlog associated with rigs under construction is expected to be realized in 2008 through 2012 |
| The backlog for contract drilling services associated with the Companyapstas existing rig fleet to be realized after December 31, 2006 includes dlra390dtta9 million associated with the rigs in the Asia Pacific Region, dlra74dtta0 million associated with rigs in the Europe/Africa region and dlra100dtta3 million associated with rigs in North and South America |
| Major Customers The Company provides its services to major international, government-owned and independent oil and gas companies |
| The number of customers served by the Company has decreased in recent years as a result of mergers among the major international oil companies and large independent oil companies |
| ExxonMobil provided approximately 12prca of consolidated revenues in 2005 |
| The next four largest customers for 2005, none of which individually represented more than 10prca of revenues, accounted in the aggregate for approximately 30prca of 2005 consolidated revenues |
| In 2004, no customer represented more than 10prca of revenues and the five largest customers for 2004 accounted in the aggregate for approximately 40prca of 2004 consolidated revenues |
| Industry Conditions Operations in the offshore contract drilling industry have historically been highly cyclical and are primarily related to the demand for drilling rigs and the available supply of rigs |
| Demand for rigs is directly related to the regional and worldwide levels of offshore exploration and development spending by oil and gas companies, which is beyond the control of the Company |
| Such levels of spending may be influenced significantly by oil and natural gas prices and expected changes in or instability of such prices, as well as other factors, including: • demand for oil and gas, • regional and global economic conditions and expected changes therein, • political, social and legislative environments in the US and other major oil-producing countries, • production levels and related activities of OPEC and other oil and gas producers, • technological advancements that impact the methods or cost of oil and gas exploration and development, and • the impact these and other events have on the current and expected future pricing of oil and natural gas |
| 5 _________________________________________________________________ [56]Table of Contents Events causing reductions in exploration and development spending by oil and gas companies may decrease demand for the Companyapstas services and adversely impact revenues through lower day rates and reduced utilization of the Companyapstas equipment |
| The supply of drilling rigs is limited and new rigs require a substantial capital investment and a long period of time to construct |
| In addition, it is time consuming and costly to move rigs between markets |
| Accordingly, as demand changes in a particular market, the supply of rigs may not adjust quickly, and therefore the utilization and day rates of rigs could fluctuate significantly |
| Industry conditions fluctuate in response to supply and demand forces |
| During industry upturns, the Company usually experiences higher utilization and day rates, and generally is able to negotiate more favorable contract terms |
| During industry downturns, the Company competes more aggressively for contracts at lower day rates and may accept less favorable commercial terms and contractual liability and indemnity provisions that do not offer the same level of protection against potential losses as can be obtained during industry upturns |
| Increased contractual liabilities may have an adverse effect on results of operations in connection with risks for which the Company is uninsured or underinsured, or in relation to increased cost of insurance |
| Additional information regarding industry conditions is presented in "e Item 7 |
| Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e |
| Competition The offshore contract drilling industry is highly competitive with numerous industry participants |
| Drilling contracts are, for the most part, awarded on a competitive bid basis |
| Price competition is often the primary factor in determining which qualified contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, reputation and technical expertise are also factors |
| The Company has numerous competitors in the offshore contract drilling industry, several of which are larger and have greater resources than the Company |
| Governmental Regulation The Companyapstas operations are affected by political developments and by local, state, federal and foreign laws and regulations that relate directly to the oil and gas industry |
| The offshore contract drilling industry is dependent on demand for services from the oil and natural gas exploration industry |
| Accordingly, the Company will be directly affected by the approval and adoption of laws and regulations curtailing exploration and development drilling for oil and natural gas for economic, environmental, safety and other policy reasons |
| It is also possible that these laws and regulations could adversely affect the Companyapstas operations in the future by significantly increasing operating costs |
| Environmental Matters The Companyapstas operations are subject to local, state, federal and foreign laws and regulations controlling the discharge of materials into the environment, contamination, and hazardous waste disposal or otherwise relating to the protection of the environment |
| Laws and regulations specifically applicable to the Companyapstas business activities could impose significant liability on the Company for damages, clean-up costs, fines and penalties in the event of the occurrence of oil spills or similar discharges of pollutants or contaminants into the environment or improper disposal of hazardous waste in the course of the Companyapstas operations |
| To date, such laws and regulations have not had a material adverse effect on the Companyapstas results of operations, and the Company has not experienced an accident that has exposed it to material liability for discharges of pollutants into the environment |
| However, events in recent years have heightened environmental concerns about the oil and gas industry generally |
| From time to time, legislative proposals have been introduced that would materially limit or prohibit offshore drilling in certain areas |
| To date, no proposals which would materially limit or prohibit offshore drilling in the Companyapstas principal areas of operation have been enacted into law |
| If laws are enacted or other governmental action is taken that restrict or prohibit offshore drilling in the Companyapstas principal areas of operation or impose environmental protection requirements that materially increase the cost of offshore drilling, exploration, development or production of oil and gas, the Company could be materially adversely affected |
| 6 _________________________________________________________________ [57]Table of Contents The United States Oil Pollution Act of 1990 ( "e OPA 90 "e ), as amended, and other federal statutes applicable to the Company and its operations, as well as similar state statutes in Texas, Louisiana and other coastal states, address oil spill prevention and control and significantly expand liability, fine and penalty exposure across many segments of the oil and gas industry |
| These statutes and related regulations, both federal and state, impose a variety of obligations on the Company related to the prevention of oil spills and liability for resulting damages |
| For instance, OPA 90 imposes strict and, with limited exceptions, joint and several liability upon each responsible party for oil removal costs and a variety of fines, penalties and damages |
| A failure to comply with these statutes, including without limitation, OPA 90, may subject the Company to civil or criminal enforcement action, which may not be covered by contractual indemnification or insurance, and could have a material adverse effect on our financial position, results of operations and cash flows |
| International Operations A significant portion of the Companyapstas contract drilling operations is conducted in foreign countries |
| Revenues from international operations as a percentage of the Companyapstas total revenues were 59prca and 63prca in 2005 and 2004, respectively |
| The Companyapstas international operations are subject to political, economic and other uncertainties, such as the risks of foreign terrorist acts, expropriation or nationalization of the Companyapstas equipment, expropriation or nationalization of a customerapstas property or drilling rights, repudiation of contracts, adverse tax policies, general hazards associated with international sovereignty over certain areas in which the Company operates and fluctuations in international economies and currencies |
| The Company has historically maintained insurance coverage and contractual indemnities that protect it from some, but not all, of the risks associated with its foreign operations |
| However, there can be no assurance that any particular type of insurance coverage will be available in the future or that the Company will be able to purchase its desired level of insurance coverage at commercially feasible rates |
| Accordingly, a significant event for which the Company is uninsured or underinsured, or for which the Company fails to recover a contractual indemnity from a customer, could cause a material adverse effect on the Companyapstas financial position, results of operations and cash flows |
| The Company is subject to various tax laws and regulations in substantially all of the foreign countries in which it operates |
| The Company evaluates applicable tax laws and employs various business structures and operating strategies in foreign countries to obtain the optimal level of taxation on its revenues, income and assets |
| Actions by foreign tax authorities that impact the Companyapstas business structures and operating strategies, such as changes to tax treaties, laws and regulations, or repeal of same, adverse rulings in connection with audits, or other challenges, may result in substantially increased tax expense |
| The Companyapstas international operations also face the risk of fluctuating currency values, which can impact revenues and operating costs denominated in foreign currencies |
| In addition, some of the countries in which the Company operates have occasionally enacted exchange controls |
| Historically, the Company has been able to limit these risks by invoicing and receiving payment in US dollars or freely convertible international currency and, to the extent possible, by limiting acceptance of foreign currency to amounts which approximate its expenditure requirements in such currencies |
| However, there is no assurance that the Company will be able to renegotiate such terms in the future |
| The Company also uses foreign currency purchase options or futures contracts to reduce its exposure to foreign currency risk |
| The Company currently conducts contract drilling operations in certain countries that have experienced substantial devaluations of their currency compared to the US dollar |
| However, since the Companyapstas drilling contracts generally stipulate payment wholly or substantially in US dollars, the Company has experienced no significant losses due to the devaluation of such currencies |
| 7 _________________________________________________________________ [58]Table of Contents Executive Officers of the Registrant The following table sets forth certain information regarding the current executive officers of the Company: Name Age Position with the Company Carl F Thorne 65 Chairman of the Board and Chief Executive Officer William S Chadwick, Jr |
| 58 Vice President, General Counsel and Secretary David A Armour 48 Controller Ramon Yi 52 Treasurer 8 _________________________________________________________________ [59]Table of Contents Set forth below is certain additional information concerning the executive officers of the Company, including the business experience of each executive officer for at least the last five years |
| Carl F Thorne has been a Director of the Company since December 1986 |
| He was elected President and Chief Executive Officer of the Company in May 1987, and served as President until January 2002 |
| He was first elected Chairman of the Board of Directors in November 1987 |
| Thorne holds a Bachelor of Science Degree in Petroleum Engineering from The University of Texas at Austin and a Juris Doctorate Degree from Baylor University College of Law |
| William S Chadwick, Jr |
| joined the Company in June 1987 and was elected to his present position of Executive Vice President and Chief Operating Officer effective January 2, 2006 |
| Chadwick served the Company as Senior Vice President - Operations, Senior Vice President, Member - Office of the President and Chief Operating Officer and as Vice President - Administration and Secretary |
| Chadwick holds a Bachelor of Science Degree in Economics from the Wharton School of the University of Pennsylvania |
| J W Swent joined the Company in July 2003 and was elected to his present position of Senior Vice President and Chief Financial Officer effective July 28, 2003 |
| Swent previously held various financial executive positions in the information technology, telecommunications and manufacturing industries, including Memorex Corporation and Nortel Networks |
| Prior to joining the Company, Mr |
| He is a graduate of the University of California at Berkeley, where he received a Bachelor of Science Degree in Finance and Masters Degree in Business Administration |
| P J Saile joined the Company in August 1987 and was elected Senior Vice President - Business Development and SHE in August 2005 |
| In addition, he serves as the Senior Executive having oversight responsibility for Engineering |
| Saile served the Company as Senior Vice President, Member - Office of the President and Chief Operating Officer, and as Vice President - Operations until June 2002 when he became President and Chief Operating Officer of ENSCO Offshore International Company, a subsidiary of the parent company, a position he held until July 2005 |
| Saile holds a Bachelor of Business Administration Degree from the University of Mississippi |
| 9 _________________________________________________________________ [60]Table of Contents Richard A LeBlanc joined the Company in July 1989 as Manager of Finance |
| He assumed responsibilities for the investor relations function in March 1993 |
| Prior to his current position, he was elected Treasurer in May 1995 and Vice President - Corporate Finance, Investor Relations and Treasurer in May 2002 |
| LeBlanc holds a Bachelor of Science Degree in Finance and a Master of Business Administration Degree, both from Louisiana State University |
| H E Malone, Jr |
| joined the Company in August 1987 and was elected Vice President - Finance effective May 2004 |
| Malone holds Bachelor of Business Administration Degrees from The University of Texas at Austin and Southern Methodist University and a Master of Business Administration Degree from the University of North Texas |
| Paul Mars joined the Company in June 1998 and served as Vice President - Engineering from May 2003 until July 2005, when he was elected to his current position |
| Mars previously served the Company as General Manager for the Europe and Africa Business Unit |
| Prior to joining the Company, Mr |
| Mars served in various capacities as an employee of Smedvig Offshore Limited and Transworld North Sea Drilling Services Limited |
| Mars holds a Bachelor of Science Honors Degree in Naval Architecture from the University of Newcastle upon Tyne, England |
| Charles A Mills joined the Company in June 2004 as Vice President - Human Resources and Security |
| He has over 27 years oil and gas industry experience in human resources and managerial positions most recently from 1989 to 2002 with Hunt Oil Company where he was Senior Vice President Human Resources and Corporate Services |
| Mills held a number of executive and management positions with Tenneco Oil E & P and Shell Oil Company |
| Mills holds a Bachelor of Science degree in Management from the University of West Florida |
| joined the Company in January 2002 and thereupon was elected Vice President, General Counsel and Secretary |
| Moomjian has over thirty years of experience in the oil and gas industry |
| Moomjian served in various management and executive capacities as an employee of Santa Fe International Corporation, including Vice President, General Counsel and Secretary from 1993 to 2001 |
| Moomjian holds a Bachelor of Arts Degree from Occidental College and a Juris Doctorate Degree from Duke University School of Law |
| 10 _________________________________________________________________ [61]Table of Contents David A Armour joined the Company in October 1990 as Assistant Controller and was elected Controller effective January 2002 |
| Armour served in various capacities as an employee of the public accounting firm Deloitte & Touche LLP, and its predecessor firm, Touche Ross & Co |
| Armour holds a Bachelor of Business Administration Degree from The University of Texas at Austin |
| Ramon Yi joined the Company in August 2004 as Treasurer |
| Yi has over thirty years of business experience in a variety of industries, most recently as Corporate Treasurer in the manufacturing and high tech sectors, including Sunrise Medical and Fresenius Medical Care, global manufacturers of durable medical equipment, and Symbios, Inc, a manufacturer of semiconductor chips |
| He was also Vice President for George E Warren Corporation and Assistant Treasurer for Northeast Petroleum Corporation, both in the petroleum trading and marketing industry |
| Yi earned a Bachelor of Arts degree from Harvard University in 1975 and a Master of Business Administration in Finance and Accounting from Boston University |
| Officers each serve for a one-year term or until their successors are elected and qualified to serve |
| Thorne and Mr |
| On February 6, 2006, Daniel W Rabun, age 51, was named by ENSCOapstas Board of Directors to serve as President of the Company and as a member of the Board of Directors, effective on or before March 31, 2006 |
| Rabun has been a partner at the international law firm of Baker & McKenzie where he has practiced law since 1986 |
| He left the firm from October 2000 to August 2001, to serve as vice president, general counsel and secretary of Chorum Technologies Inc |
| Rabun has provided legal advice and counsel to ENSCO for over fifteen years, and served as a Director of the Company during 2001 |
| He holds a BBA in Accounting from the University of Houston and a Juris Doctorate Degree from Southern Methodist University |
| He has been a Certified Public Accountant since 1976 and was admitted to the Texas Bar in 1983 |
| Rabun will report to Carl F Thorne who will continue to serve as ENSCOapstas Chairman and Chief Executive Officer |
| Thorne will step down as Chief Executive Officer within the next year, at which time Mr |
| Thorne will thereupon continue to serve as Chairman of the Board |
| Employees The Company had approximately 3cmam700 full-time employees worldwide as of February 1, 2006 |
| Available Information The Companyapstas Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act and reports pertaining to the Company filed under Section 16 of the Securities Exchange Act are available on the Companyapstas website at www |
| com as soon as reasonably practicable after the Company electronically files the information with, or furnishes it to, the Securities and Exchange Commission |
| 11 _________________________________________________________________ [62]Table of Contents Item 1A Risk Factors There are many factors that affect our business and the results of our operations, many of which are beyond our control |
| The following is a description of significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired |
| THE SUCCESS OF OUR BUSINESS WILL DEPEND ON THE LEVEL OF ACTIVITY IN THE OIL AND NATURAL GAS INDUSTRY, WHICH IS SIGNIFICANTLY AFFECTED BY VOLATILE OIL AND GAS PRICES The success of our business will largely depend on the level of activity in offshore oil and natural gas exploration, development and production in markets worldwide |
| Oil and natural gas prices, and market expectations of potential changes in these prices, significantly affect the level of activity |
| An actual decline, or the perceived risk of a decline, in oil or natural gas prices could cause oil and gas companies to reduce their overall level of spending, in which case demand for our equipment and services may decrease and revenues may be adversely affected through lower rig utilization and lower average day rates |
| Worldwide military, political, environmental and economic events have also contributed to oil and natural gas price volatility and are likely to continue to do so in the future |
| Numerous other factors may affect oil and natural gas prices and the level of demand for our services, including: • demand for oil and gas, • the ability of OPEC to set and maintain production levels and pricing, • the level of production by non-OPEC countries, • domestic and foreign tax policy, • laws and governmental regulations that restrict exploration and development of oil and natural gas in various jurisdictions, • advances in exploration and development technology, and • the worldwide military or political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East or geographic areas in which we operate, or acts of terrorism in the United States or elsewhere |
| 12 _________________________________________________________________ [63]Table of Contents THE OFFSHORE CONTRACT DRILLING INDUSTRY IS CYCLICAL, WITH PERIODS OF LOW DEMAND AND EXCESS RIG AVAILABILITY THAT COULD RESULT IN ADVERSE EFFECTS ON OUR BUSINESS Financial operating results in the offshore contract drilling industry have historically been very cyclical and primarily are related to the demand for drilling rigs and the available supply of rigs |
| Demand for rigs is directly related to the regional and worldwide levels of offshore exploration and development spending by oil and gas companies, which is beyond our control |
| Offshore exploration and development spending may fluctuate substantially from year to year and from region to region as noted in "e THE SUCCESS OF OUR BUSINESS WILL DEPEND ON THE LEVEL OF ACTIVITY IN THE OIL AND NATURAL GAS INDUSTRY, WHICH IS SIGNIFICANTLY AFFECTED BY VOLATILE OIL AND GAS PRICES "e above |
| The supply of drilling rigs is limited and new rigs require a substantial capital investment and a long period of time to construct |
| Currently, there are over seventy new rigs, primarily jackup rigs, reported to be on order for delivery by the end of 2009 |
| There are no assurances that the market will be able to fully absorb the supply of new rigs scheduled to enter the market in future periods |
| It is time consuming and costly to move rigs between geographic areas |
| Accordingly, as demand changes in a particular market, the supply of rigs may not adjust quickly, and therefore the utilization and day rates of rigs could fluctuate significantly |
| Certain events, such as hurricanes, craterings, punchthrough and blowouts may impact the supply of rigs in a particular market and cause rapid fluctuations in rig demand, utilization and day rates |
| Periods of decreased demand and excess rig supply may require us to idle rigs or to enter into lower rate contracts |
| There can be no assurance that the current demand for drilling rigs will not decline in future periods, nor can there be any assurance concerning any adverse effect resulting from such decrease in activity |
| 13 _________________________________________________________________ [64]Table of Contents THE OFFSHORE CONTRACT DRILLING INDUSTRY IS HIGHLY COMPETITIVE WHICH COULD LEAD US TO ACCEPT LOWER DAY RATES AND LESS FAVORABLE CONTRACT TERMS DURING INDUSTRY DOWNTURNS The offshore contract drilling industry is highly competitive with numerous industry participants |
| The industry has experienced consolidation in recent years and may experience additional consolidation |
| Furthermore, recent mergers among oil and natural gas exploration and production companies have reduced the number of available customers |
| Drilling contracts are, for the most part, awarded on a competitive bid basis |
| Price competition is often the primary factor in determining which qualified contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, reputation and technical expertise are also factors |
| We will compete with numerous offshore drilling contractors, several of which are larger and have greater resources than us |
| During good industry market cycles we experience higher utilization, receive relatively high average day rates, and also generally are able to negotiate more favorable contract terms |
| During adverse industry market cycles, we compete more aggressively for contracts at lower day rates and may have to accept contractual liability and indemnity provisions that do not offer the same level of protection against potential losses as can be obtained during good industry market cycles |
| Lower day rates and/or utilization will adversely affect our results of operations |
| Increased contractual liabilities may also have an adverse effect on results of operations, especially in respect of risks for which we are uninsured or underinsured, or in relation to increased cost of insurance |
| 14 _________________________________________________________________ [65]Table of Contents WE MAY SUFFER LOSSES IF OUR CUSTOMERS TERMINATE OR SEEK TO RENEGOTIATE OUR CONTRACTS Our drilling contracts often are cancelable upon specific notice by the customer |
| Although contracts may require the customer to pay an early termination payment upon cancellation, such payment may not fully compensate for the loss of the contract |
| In periods of rapid market downturn, our customers may not honor the terms of existing contracts, may terminate contracts or may seek to renegotiate contract rates and terms to conform with depressed market conditions |
| Furthermore, contracts customarily specify automatic termination or termination at the option of the customer in the event of a total loss of the drilling rig and often include provisions addressing termination rights or cessation of day rates if operations are suspended for extended periods by reason of excessive downtime for repairs, acts of God or other specified conditions |
| Our operating results may be adversely affected by early termination of contracts, contract renegotiations or cessation of day rates while operations are suspended |
| OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF CERTAIN CUSTOMERS CEASE TO DO BUSINESS WITH US We provide our services to major international, government-owned and independent oil and gas companies |
| However, the number of customers served by us has decreased in recent years as a result of mergers among the major international oil companies and large independent oil companies |
| ExxonMobil provided approximately 12prca of our consolidated revenues in 2005 |
| The next four largest customers for 2005 accounted in the aggregate for approximately 30prca of our 2005 consolidated revenues |
| Our results of operations may be materially adversely affected if any major customer terminates its contracts with us, fails to renew its existing contracts with us, or declines to award new contracts to us |
| 15 _________________________________________________________________ [66]Table of Contents OUR BUSINESS INVOLVES NUMEROUS OPERATING HAZARDS AND WE ARE NOT FULLY INSURED AGAINST ALL OF THESE HAZARDS Contract drilling and offshore oil and gas operations in general are subject to numerous risks, including the following: • rig or other property damage resulting from hurricanes and other severe weather conditions, collisions, groundings, blowouts, fires, explosions and other accidents or terrorism, • blowouts, fires, explosions and other loss of well control events causing damage to wells, reservoirs, production facilities and other properties and which may require wild well control, including drilling of relief wells, • craterings, punchthroughs or other events causing rigs to capsize, sink or otherwise incur significant damage, • extensive uncontrolled fires, blowouts, oil spills or other discharges of pollutants causing damage to the environment, • machinery breakdowns, equipment failures, personnel shortages, failure of subcontractors and vendors to perform or supply goods and services and other events causing the suspension or cancellation of drilling operations, and • unionization or similar collective actions by our employees or employees of subcontractors causing significant increases in operating costs |
| In addition, many of the hazards and risks associated with our operations, and accidents or other events resulting from such hazards and risks, expose our personnel, as well as personnel of our customers, subcontractors, vendors and other third parties, to risk of personal injury or death |
| We currently maintain broad insurance coverage, subject to certain significant deductibles and levels of self-insurance, but it does not cover all types of losses and in some situations it may not provide full coverage of losses or liabilities resulting from our operations |
| We have historically maintained insurance coverage for damage to our drilling rigs for amounts not less than the estimated fair market value thereof |
| However, in the event of total loss, such coverage is unlikely to be sufficient to recover the cost of a newly constructed replacement rig |
| Additionally, we do not generally maintain business interruption or loss of hire insurance |
| 16 _________________________________________________________________ [67]Table of Contents We obtain contractual indemnification from our customers whereby such customers generally agree to protect and indemnify us for liabilities resulting from pollution and damage to the environment, damage to wells, reservoirs and other customer property, control of wild wells, drilling of relief wells and certain personnel injuries |
| The failure of a customer to meet indemnification obligations, the failure of one or more of our insurance providers to meet claim obligations, or losses or liabilities resulting from uninsured or underinsured events could have a material adverse effect on our financial position, results of operations and cash flows |
| However, losses resulting from contracts that do not contain such protection could have a material adverse affect on our financial position, results of operations and cash flows |
| Losses resulting from our gross negligence or willful misconduct may not be protected contractually by specific provision or by application of law, and our insurance may not provide adequate protection for such losses |
| Moreover, the cost of many of the types of insurance coverage maintained by us has increased significantly during recent years |
| In addition, insurance market conditions have resulted in retention of additional risk by us, primarily through higher insurance deductibles |
| Very few insurance underwriters offer certain types of insurance coverage maintained by us, and there can be no assurance that any particular type of insurance coverage will continue to be available in the future, that we will not accept retention of additional risk through higher insurance deductibles or otherwise, or that we will be able to purchase our desired level of insurance coverage at commercially feasible rates |
| Further, due to the losses sustained by us and the offshore drilling industry as a consequence of hurricanes that occurred in the Gulf of Mexico in 2005 and 2004, we may not be able to obtain future insurance coverage comparable with that of prior years, thus putting us at a greater risk of loss due to severe weather conditions which could have a material adverse effect on our financial position, results of operations and cash flows |
| In addition, we are likely to experience increased cost for available insurance coverage which may impose higher deductibles and limit maximum aggregate recoveries for certain perils such as hurricane related windstorm damage or loss |
| Our primary insurance policies renew annually effective July 1, and we may modify our risk management program in response to changes in the insurance market, including possible implementation of a captive insurance program or increased risk retention |
| 17 _________________________________________________________________ [68]Table of Contents OUR INTERNATIONAL OPERATIONS INVOLVE ADDITIONAL RISKS NOT ASSOCIATED WITH DOMESTIC OPERATIONS A significant portion of our contract drilling operations are conducted in foreign countries |
| Revenues from international operations as a percentage of our total revenues were 59prca and 63prca in 2005 and 2004, respectively |
| Our international operations and our international shipyard rig construction and enhancement projects are subject to political, economic and other uncertainties, such as the risks of: • foreign terrorist acts, war and civil disturbances, • expropriation, nationalization or deprivation of our equipment, • expropriation or nationalization of a customerapstas property or drilling rights, • repudiation of contracts, • assaults on property or personnel, • foreign exchange restrictions, • foreign currency fluctuations, • foreign taxation, • limitations on the ability to repatriate income or capital to the United States, • changing local and international political conditions, and • foreign and domestic monetary policies |
| 18 _________________________________________________________________ [69]Table of Contents We have historically maintained insurance coverage and contractual indemnities that protect us from some, but not all, of the risks associated with our foreign operations |
| However, there can be no assurance that any particular type of insurance coverage will be available in the future or that we will be able to purchase our desired level of insurance coverage at commercially feasible rates |
| Accordingly, a significant international event for which we are uninsured or underinsured, or for which we fail to recover a contractual indemnity from a customer, could cause a material adverse effect on our financial position, results of operations and cash flows |
| We are subject to various tax laws and regulations in substantially all of the foreign countries in which we operate |
| We evaluate applicable tax laws and employ various business structures and operating strategies in foreign countries to obtain the optimal level of taxation on our revenues, income, assets and personnel |
| Actions by foreign tax authorities that impact our business structures and operating strategies, such as changes to tax treaties, laws and regulations, or repeal of same, adverse rulings in connection with audits, or other challenges, may result in substantially increased tax expense |
| Our international operations also face the risk of fluctuating currency values, which can impact revenues and operating costs denominated in foreign currencies |
| In addition, some of the countries in which we operate have occasionally enacted exchange controls |
| Historically, we have been able to limit these risks by invoicing and receiving payment in US dollars or freely convertible international currency and, to the extent possible, by limiting acceptance of foreign currency to amounts which approximate our expenditure requirements in such currencies |
| However, there is no assurance that we will be able to renegotiate such terms in the future |
| We also use foreign currency purchase options or futures contracts to reduce our exposure to foreign currency risk |
| We currently conduct contract drilling operations in certain countries that have experienced substantial devaluations of their currency compared to the US dollar |
| However, since our drilling contracts generally stipulate payment wholly or substantially in US dollars, we have experienced no significant losses due to the devaluation of such currencies |
| However, there is no assurance that we will be able to negotiate such payment terms in the future |
| Our international operations are also subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipment and operation of drilling rigs |
| Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration of oil and gas and other aspects of the oil and gas industries in their countries |
| In addition, government action, including initiatives by OPEC, may continue to cause oil or gas price volatility |
| In some areas of the world, this government activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so |
| There can be no assurance that these laws and regulations or activities will not have a material adverse effect on our operations in the future |
| 19 _________________________________________________________________ [70]Table of Contents COMPLIANCE WITH OR BREACH OF ENVIRONMENTAL LAWS CAN BE COSTLY AND COULD LIMIT OUR OPERATIONS Our operations are subject to local, state, federal and foreign laws and regulations controlling the discharge of materials into the environment, contamination and hazardous waste disposal or otherwise relating to the protection of the environment |
| Laws and regulations specifically applicable to our business activities could impose significant liability on us for damages, clean-up costs, fines and penalties in the event of the occurrence of oil spills or similar discharges of pollutants or contaminants into the environment or improper disposal of hazardous waste in the course of our operations |
| To date, such laws and regulations have not had a material adverse effect on our results of operations and we have not experienced an accident that has exposed us to material liability for discharges of pollutants into the environment |
| However, there can be no assurance that such laws and regulations or accidents will not expose us to material liability in the future |
| Moreover events in recent years have heightened environmental concerns about the oil and gas industry generally |
| To date, no proposals which would materially limit or prohibit offshore drilling in our principal areas of operation have been enacted into law |
| If laws are enacted or other governmental action is taken that restrict or prohibit offshore drilling in our principal areas of operation or impose environmental protection requirements that materially increase the cost of offshore drilling, exploration, development or production of oil and gas, we could be materially adversely affected |
| The United States Oil Pollution Act of 1990 ( "e OPA 90 "e ), as amended, and other federal statutes applicable to us and our operations, as well as similar state statutes in Texas, Louisiana and other coastal states, address oil spill prevention and control and significantly expand liability, fine and penalty exposure across many segments of the oil and gas industry |
| These statutes and related regulations, both federal and state, impose a variety of obligations on us related to the prevention of oil spills and liability for resulting damages |
| For instance, OPA 90 imposes strict and, with limited exceptions, joint and several liability upon each responsible party for oil removal costs and a variety of fines, penalties and damages |
| A failure to comply with these statutes, including without limitation, OPA 90, may subject us to civil or criminal enforcement action, which may not be covered by contractual indemnification or insurance, and could have a material adverse effect on our financial position, results of operations and cash flows |
| LAWS AND GOVERNMENTAL REGULATIONS MAY ADD TO COSTS OR LIMIT OUR DRILLING ACTIVITY Our operations are affected by political developments and by local, state, federal and foreign laws and regulations that relate directly to the oil and gas industry |
| The offshore contract drilling industry is dependent on demand for services from the oil and natural gas exploration industry |
| Accordingly, we will be directly affected by the approval and adoption of laws and regulations curtailing exploration and development drilling for oil and natural gas for economic, environmental, safety and other policy reasons |
| Furthermore, we may be required to make significant capital expenditures to comply with governmental laws and regulations |
| It is also possible that these laws and regulations could adversely affect our operations in the future by limiting drilling opportunities or significantly increasing operating costs |
| 20 _________________________________________________________________ [71]Table of Contents OUR DRILLING RIG FLEET IS HEAVILY CONCENTRATED IN PREMIUM JACKUP RIGS, WHICH LEAVES US VULNERABLE TO RISKS RELATED TO LACK OF DIVERSIFICATION The offshore contract drilling industry is generally divided into two broad markets: deepwater and shallow water drilling |
| Broad markets are generally divided into smaller sub-markets based upon various factors, including type of drilling rig |
| The primary types of drilling rigs include: jackup rigs, semisubmersible rigs, drill ships, platform rigs, barge rigs and submersible rigs |
| While these market segments are affected by common characteristics, they each have separate market conditions that affect the demand and rates for drilling equipment in that segment |
| Our current complement of offshore drilling rigs is comprised of 43 premium jackup rigs, one ultra-deepwater semisubmersible rig, one platform rig and one barge rig |
| Additionally, we have two ultra-deepwater semisubmersible rigs and one ultra-high specification jackup rig under construction |
| Accordingly, our drilling fleet is heavily concentrated in the premium jackup rig market |
| If the market for premium jackup rigs should decline relative to the markets for other drilling rig types, our results of operations could be more adversely affected relative to our competitors which may have drilling fleets that are not concentrated in premium jackup rigs |
| NEW TECHNOLOGIES MAY CAUSE OUR CURRENT DRILLING METHODS TO BECOME OBSOLETE, RESULTING IN AND ADVERSE EFFECT ON OUR BUSINESS The offshore contract drilling industry is subject to the introduction of new drilling techniques and services using new technologies, some of which may be subject to patent protection |
| As competitors and others use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost |
| In addition, competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can |
| We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us |
| One or more of the technologies that we currently use or that we may implement in the future may become obsolete, and we may be adversely affected |
| 21 _________________________________________________________________ [72]Table of Contents OUR DRILLING RIGS ARE SUSCEPTIBLE TO DAMAGE OR DESTRUCTION BY SEVERE WEATHER Certain areas in and near the Gulf of Mexico experience hurricanes and other extreme weather conditions on a relatively frequent basis |
| Some of our drilling rigs in the Gulf Coast Region are located in areas that could cause them to be susceptible to damage and/or total loss by these storms and we have a larger concentration of rigs in the Gulf Coast Region than most of our competitors |
| Damage caused by high winds and turbulent seas could potentially cause us to curtail operations on such drilling rigs for significant periods of time until damage can be repaired |
| Moreover, even if our drilling rigs are not directly damaged by such storms, we may experience disruptions in our operations due to damage to our customerapstas platforms and other related facilities in the area |
| To date, our drilling operations in the Gulf of Mexico have not been materially impacted by hurricanes, although we sustained the total loss of one jackup rig in 2004 and one platform rig in 2005 by reason of hurricane damage |
| Due to the losses sustained by us and the offshore drilling industry as a consequence of hurricanes that occurred in the Gulf of Mexico in 2005 and 2004, we may not be able to obtain future insurance coverage comparable with that of prior years, thus putting us at a greater risk of loss due to severe weather conditions which could have a material adverse effect on our financial position, results of operations and cash flows |
| In addition, we are likely to experience increased cost for available insurance coverage which may impose higher deductibles and limit maximum aggregate recoveries for certain perils such as hurricane related windstorm damage or loss |
| Our primary insurance policies renew annually effective July 1, and we may modify our risk management program in response to changes in the insurance market, including possible implementation of a captive insurance program or increased risk retention |
| 22 _________________________________________________________________ [73]Table of Contents CHANGES IN LAWS, EFFECTIVE TAX RATES OR ADVERSE OUTCOMES RESULTING FROM EXAMINATION OF OUR TAX RETURNS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS Our future effective tax rates could be adversely affected by changes in tax laws both domestically and internationally |
| Our future effective tax rates could also be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax treaties, regulations, accounting principles or interpretations thereof in one or more countries in which we operate |
| In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities |
| We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes |
| There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition |
| In July 2005, the FASB issued an Exposure Draft of a proposed Interpretation "e Accounting for Uncertain Tax Positions - an interpretation of FASB Statement Nodtta 109 "e |
| The proposed Interpretation proposes changes to the current accounting for uncertain tax positions |
| While we cannot predict with certainty the rules in the final Interpretation, there is risk that the final Interpretation could result in a cumulative effect charge to earnings upon adoption, increases in future effective tax rates, and/or increases in future effective tax rate volatility |
| In addition, we may construct additional rigs and continue to upgrade the capability and extend the service lives of other rigs |
| Rig upgrade, life extension and construction projects are subject to the risks of delay or cost overruns inherent in any large construction project, including the following: • shortages of materials or skilled labor, • unforeseen engineering problems, • unanticipated actual or purported change orders, • work stoppages, • financial or operating difficulties of the shipyard upgrading, refurbishing or constructing the rig, • adverse weather conditions, • unanticipated cost increases, • inability to obtain any of the requisite permits or approvals, and • additional risks inherent to ship building and ship repairing in a foreign location |
| The risks are concentrated in respect of our three rigs currently under construction at one shipyard in Singapore |
| Significant shipyard project cost overruns or delays could materially and adversely affect our financial condition and results of operations |
| 24 _________________________________________________________________ [75]Table of Contents FAILURE TO OBTAIN AND RETAIN SKILLED PERSONNEL COULD IMPEDE OUR OPERATIONS We require highly skilled personnel to operate and provide technical services and support for our business |
| Competition for the skilled and other labor required for drilling operations has intensified as the number of rigs activated or added to worldwide fleets or under construction has increased in the last few years |
| Specfically, there are over seventy new rigs, primarily jackup rigs, reported to be on order for delivery by the end of 2009, which will require new skilled and other personnel to operate |
| Although competition for skilled and other labor has not materially affected us to date, the possibility exists that competition for skilled and other labor for operations could limit our results of operations in the future |
| In 2001, we entered into a voluntary agreement with a labor union in the North Sea and have not experienced any significant work stoppages or strikes as a result of labor disputes |
| Although none of our domestic employees are currently represented by unions, there may be continued labor union efforts to organize offshore employees in the Gulf of Mexico |
| Unionization or similar collective actions by our employees, domestically and internationally, may adversely impact our cost of labor |
| 25 _________________________________________________________________ [76]Table of Contents TERRORIST ATTACKS AND MILITARY ACTION COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR BUSINESS Terrorist acts or acts of war may cause damage to or disruption of our United States or international operations, employees, property and equipment, or customers, suppliers and subcontractors, which could significantly impact our financial position, results of operations and cash flows |
| Terrorist acts often create many economic and political uncertainties and the potential for future terrorist acts, the national and international responses to terrorism, and other acts of war or hostility could create many economic and political uncertainties, including an impact upon oil and gas drilling, exploration and development, which could adversely affect our business in ways that cannot readily be determined |