| PRIDE INTERNATIONAL INC ITEM 1A RISK FACTORS Failure to attract and retain skilled personnel could hurt 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 our operations intensifies as the number of rigs activated or added to worldwide fleets or under construction increases |
| In periods of high utilization, such as the current period, we have found it more difficult to find and retain qualified individuals |
| We have experienced tightening in the relevant labor markets within the last year and have recently sustained the loss of experienced personnel to our customers and competitors |
| Our labor costs increased significantly in 2005, and this trend has continued in 2006 |
| The shortages of qualified personnel or the inability to obtain and retain qualified personnel could negatively affect the quality and timeliness of our work |
| We are intensifying our recruitment and training programs in an effort to meet our anticipated personnel needs |
| These efforts may be unsuccessful, and competition for skilled personnel could materially impact our business by limiting our operations or further increase our costs |
| A material or extended decline in expenditures by oil and natural gas companies due to a decline or volatility in oil and natural gas prices, a decrease in demand for oil and natural gas or other factors may reduce demand for our services and substantially reduce our profitability or result in our incurring losses |
| The profitability of our operations depends upon conditions in the oil and natural gas industry and, specifically, the level of exploration and production activity by oil and natural gas companies |
| Oil and natural gas prices and market expectations regarding potential changes in these prices significantly affect this level of activity |
| However, higher commodity prices do not necessarily translate into increased drilling activity since our customers’ expectations of future commodity prices typically drive demand for our rigs |
| Since mid-December 2005, natural gas prices have declined sharply |
| Commodity prices are directly influenced by many factors beyond our control, including: • the demand for oil and natural gas; • the cost of exploring for, producing and delivering oil and natural gas; • advances in exploration, development and production technology; • government regulations; • local and international political, economic and weather conditions; • the ability of OPEC to set and maintain production levels and prices; • the level of production by non-OPEC countries; • domestic and foreign tax policies; • the development and exploitation of alternative fuels; 8 _________________________________________________________________ [62]Table of Contents • the policies of various governments regarding exploration and development of their oil and natural gas reserves; and • the worldwide military and political environment and uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East and other oil and natural gas producing regions |
| Continued hostilities in the Middle East and the occurrence or threat of future terrorist attacks against the United States or other countries could cause a downturn in the economies of the United States and those other countries |
| A lower level of economic activity could result in a decline in energy consumption, which could cause our revenues and margins to decline and limit our future growth prospects |
| More specifically, these risks could lead to increased volatility in prices for oil and natural gas and could affect the markets for our drilling services |
| In addition, these risks could increase instability in the financial and insurance markets and make it more difficult for us to access capital and to obtain insurance coverages that we consider adequate or are otherwise required by our contracts |
| Depending on the market prices of oil and natural gas, and even during periods of high commodity prices, companies exploring for oil and natural gas may cancel or curtail their drilling programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons, including their lack of success in exploration efforts |
| Such a reduction in demand may decrease daily rates and utilization of our rigs |
| Any significant decrease in daily rates or utilization of our rigs, particularly our high-specification drillships, semisubmersible rigs or jackup rigs, could materially reduce our revenues and profitability |
| An oversupply of comparable or higher specification rigs in the markets in which we compete could depress the demand and contract prices for our rigs and materially reduce our revenues and profitability |
| During prior periods of high utilization and dayrates, industry participants have increased the supply of rigs by ordering the construction of new units |
| This has often created an oversupply of drilling units and has caused a decline in utilization and dayrates when the rigs enter the market, sometimes for extended periods of time as rigs have been absorbed into the active fleet |
| Orders for construction of approximately 60 jackup rigs have been announced with delivery dates ranging from 2006 to 2009 |
| All of these units are cantilevered units and are considered to be premium units |
| In the ultra-deepwater sector, there have been announcements of approximately 20 new high-specification semisubmersible rigs, approximately seven ultra-deepwater drillships and the upgrade of approximately four other semisubmersibles to ultra-deepwater units, with delivery forecast to occur from 2007 through 2010 |
| A number of the contracts for units currently under construction provide for options for the construction of additional units, and we believe further new construction announcements are likely for all classes of rigs pursuant to the exercise of one or more of these options and otherwise |
| In addition, we expect that a number of our competitors’ jackups and mid-water depth semisubmersibles that are currently “cold-stacked” (ie, minimally crewed with little or no scheduled maintenance being performed) will continue to reenter the market |
| The entry into service of newly constructed, upgraded or reactivated units will increase marketed supply and could curtail a further strengthening of dayrates, or reduce them, in the affected markets or result in a softening of the affected markets as rigs are absorbed into the active fleet |
| Any further increase in construction of new drilling units may exacerbate the negative impacts on utilization and dayrates |
| In addition, the new construction of high specification rigs, as well as changes in our competitors’ drilling rig fleets, could require us to make material additional capital investments to keep our rig fleet competitive |
| Our industry is highly competitive and cyclical, with intense price competition |
| Our industry is highly competitive |
| Our contracts are traditionally awarded on a competitive bid basis |
| Pricing is often the primary factor in determining which qualified contractor is awarded a job |
| Rig availability and each contractor’s safety performance record and reputation for quality also can be key factors in the determination |
| Some of our competitors in the drilling industry are larger than we are and have more diverse fleets, or fleets with generally higher specifications, and greater resources than we have |
| These competitors also are incorporated in tax-haven countries outside the United States, which provides them with significant tax advantages that are not 9 _________________________________________________________________ [63]Table of Contents available to us as a US company and which materially impairs our ability to compete with them for many projects that would be beneficial to our company |
| In addition, recent mergers among oil and natural gas companies have reduced the number of available customers, resulting in increased price competition |
| We may not be able to maintain our competitive position, and we believe that competition for contracts will continue to be intense in the foreseeable future |
| Our inability to compete successfully may reduce our revenues and profitability |
| Historically, the offshore service industry has been highly cyclical, with periods of high demand, short rig supply and high dayrates often followed by periods of low demand, excess rig supply and low dayrates |
| Periods of low demand and excess rig supply intensify the competition in the industry and often result in rigs, particularly lower specification rigs like a large portion of our fleet, being idle for long periods of time |
| We may be required to idle rigs or enter into lower dayrate contracts in response to market conditions in the future |
| Prolonged periods of low utilization and dayrates could result in the recognition of impairment charges on certain of our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable |
| Our international operations involve additional risks not generally associated with domestic operations, which may hurt our operations materially |
| In 2005, we derived 86dtta9prca of our revenues from countries outside the United States |
| Our operations in these areas are subject to the following risks, among others: • foreign currency fluctuations and devaluation; • restrictions on currency repatriation; • political, social and economic instability, war and civil disturbances; • seizure, expropriation or nationalization of assets; • damage to our equipment or violence directed at our employees; • uncertainty or instability resulting from armed hostilities or other crises in the Middle East, West Africa, South Africa, Latin America or other geographic areas in which we operate; and • acts of terrorism |
| We attempt to limit the risks of currency fluctuation and restrictions on currency repatriation where possible by obtaining contracts providing for payment in US dollars or freely convertible foreign currency |
| To the extent possible, we seek to limit our exposure to local currencies by matching the acceptance of local currencies to our expense requirements in those currencies |
| Although we have done this in the past, we may not be able to take these actions in the future, thereby exposing us to foreign currency fluctuations that could cause our results of operations, financial condition and cash flows to deteriorate materially |
| In 2005, we derived 8dtta5prca of our revenues from operations in Venezuela, which has been experiencing political, economic and social turmoil, including labor strikes and demonstrations |
| The implications and results of the political, economic and social instability in Venezuela are uncertain at this time, but the instability could have an adverse effect on our business |
| The Venezuelan government frequently intervenes in the Venezuelan economy and occasionally makes significant changes in policy |
| Recently, the government’s actions to control inflation and implement other policies have involved wage and price controls, currency devaluations, capital controls and limits on imports, among other things |
| Several measures imposed by the Venezuelan government, such as exchange controls and currency transfer restrictions, limit our ability to convert the local currency into US dollars and transfer excess funds out of Venezuela |
| Although our current drilling contracts in Venezuela call for a significant portion of our dayrates to be paid in US dollars, changes in existing regulations or the interpretation or enforcement of those regulations could further restrict our ability to receive US dollar payments |
| The exchange controls could also result in an artificially high value being placed on the local currency |
| From time to time, certain of our foreign subsidiaries operate in countries subject to sanctions and embargoes imposed by the US government and the United Nations and countries identified by the US government as state sponsors of terrorism, such as Iran and Libya |
| From April 2002 through February 2005, one of those subsidiaries 10 _________________________________________________________________ [64]Table of Contents operated a jackup rig, the Pride Ohio, in Iranian waters |
| The subsidiary sold the rig and novated the related drilling contract to a third party in February 2005 and provided transitional services, including crews, to the purchaser until June 2005 |
| In addition, one of our foreign subsidiaries has operated a semisubmersible rig, the Pride North Sea, offshore Libya since January 2003, and in January 2005, we commenced a contract for the semisubmersible rig Pride Venezuela offshore Libya |
| Iran is subject to sanctions and embargoes imposed by the US government and identified by the US government as a state sponsor of terrorism |
| Libya currently is not subject to economic sanctions imposed by the US government, and the US government has taken action to remove Libya from its list of state sponsors of terrorism |
| In May 2004, we received a request for information from the US Department of Treasury’s Office of Foreign Assets Control regarding our involvement in the business activities of certain of our foreign subsidiaries in Libya and Iran, and we provided information pursuant to that request in July 2004 |
| Although the sanctions and embargoes identified above do not prohibit our foreign subsidiaries from entering into new contracts to provide drilling services in such embargoed countries, they do prohibit us and our domestic subsidiaries, as well as employees of our foreign subsidiaries who are US citizens, from participating in, approving or otherwise facilitating any aspect of the business activities in those countries |
| These constraints on our ability to have US persons, including our senior management, provide managerial oversight and supervision may negatively affect the financial or operating performance of such business activities |
| We do not intend to enter into new contracts to provide drilling services in such embargoed countries |
| Our international operations are also subject to other risks, including foreign monetary and tax policies and nullification or modification of contracts |
| Additionally, our ability to compete in international contract drilling markets may be limited by foreign governmental regulations that favor or require the awarding of contracts to local contractors or by regulations requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction |
| Furthermore, our foreign subsidiaries may face governmentally imposed restrictions from time to time on their ability to transfer funds to us |
| We are conducting an investigation into allegations of improper payments to foreign government officials, as well as corresponding accounting entries and internal control issues |
| The outcome and impact of this investigation are unknown at this time |
| During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations of improper payments to foreign government officials |
| In February 2006, shortly after and as a result of certain statements that were made by an employee during the investigation, the Audit Committee of our Board of Directors assumed direct responsibility over the investigation and retained independent outside counsel to investigate the allegations, as well as corresponding accounting entries and internal control issues, and to advise the Audit Committee |
| The investigation, which is continuing, has found evidence suggesting that payments, which may violate the US Foreign Corrupt Practices Act, were made beginning in early 2003 through 2005 to government officials in Latin America aggregating less than dlra1 million over the period |
| The evidence to date suggests that these payments primarily were made (a) to vendors with the intent that they would be transferred to government officials for the purpose of extending drilling contracts for two jackup rigs and one semisubmersible rig operating offshore Venezuela; (b) to one or more government officials, or to vendors with the intent that they would be transferred to government officials, for the purpose of collecting receivables for work completed under offshore drilling contracts in Venezuela; and (c) to one or more government officials in Mexico in connection with the clearing of a jackup rig and equipment through customs |
| Our management and the Audit Committee of our Board of Directors believe it likely that members of our senior operations management either were aware, or should have been aware, that improper payments to foreign government officials were made or proposed to be made |
| We have placed certain members of our senior operations management on administrative leave pending the outcome of the investigation |
| Our Chief Operating Officer resigned as Chief Operating Officer effective on May 31, 2006 and has elected to retire from the company, although he will remain an employee, but not an officer, during the pendency of the investigation to assist us with the investigation and to be available for consultation and to answer questions relating to our business |
| As described in Item 11 of this annual report, his retirement benefits will be subject to the determination by our Audit Committee or 11 _________________________________________________________________ [65]Table of Contents our Board of Directors that it does not have cause (as defined in his retirement agreement with us) to terminate his employment |
| We voluntarily disclosed information relating to the initial allegations and other information found in the investigation to the US Department of Justice and the Securities and Exchange Commission and are cooperating with these authorities as the investigation continues and as they review the matter |
| If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, including profit disgorgement, and injunctive relief |
| Civil penalties under the antibribery provisions of the FCPA could range up to dlra10cmam000 per violation, with a criminal fine up to the greater of dlra2 million per violation or twice the gross pecuniary gain to us or twice the gross pecuniary loss to others, if larger |
| Civil penalties under the accounting provisions of the FCPA can range up to dlra500cmam000, and a company that knowingly commits a violation can be fined up to dlra25 million |
| In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts |
| Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions |
| Our customers in Venezuela and Mexico could seek to impose penalties or take other actions adverse to our interests |
| In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets |
| No amounts have been accrued related to any potential fines, sanctions or other penalties |
| We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, the applicable government or other authorities or our customers or the effect the actions may have on our results of operations, financial condition or cash flows, on our consolidated financial statements or on our business in Venezuela and other jurisdictions |
| Our operations in Venezuela provided revenues of approximately dlra172dtta6 million, or approximately 8dtta5prca of our total consolidated revenues for 2005, and earnings from operations of approximately dlra16dtta8 million, or approximately 5dtta2prca of our total consolidated earnings from operations for 2005 |
| In addition, in 2005 our Venezuelan operations represented 12dtta4prca of our revenues and 6dtta7prca of our earnings from operations in our Western Hemisphere segment, 17dtta6prca of our revenues and 13dtta0prca of our earnings from operations in our Latin America Land segment and 13dtta2prca of our revenues and 13dtta5prca of our earnings from operations in our E&P Services segment |
| As of December 31, 2005 and May 31, 2006, we had accounts receivable from Petroleos de Venezuela, SA totaling dlra33dtta4 million and dlra30dtta2 million, respectively |
| While our investigation to date of these matters and related internal control systems and processes has been ongoing for some time, at this time there can be no assurances that the investigation will not uncover other violations within our global operations, including in countries outside Latin America |
| If we are unable to obtain new or favorable contracts for rigs whose contracts are expiring, our revenues and profitability could be materially reduced |
| Our ability to renew these contracts or obtain new contracts and the terms of any such contracts will depend on market conditions |
| We may be unable to renew our expiring contracts or obtain new contracts for the rigs, and the dayrates under any new contracts may be substantially below the existing dayrates, which could materially reduce our revenues and profitability |
| Our customers may seek to cancel or renegotiate some of our drilling contracts during periods of depressed market conditions or if we experience downtime or operational difficulties |
| Substantially all our contracts with major customers are dayrate contracts, where we charge a fixed charge per day regardless of the number of days needed to drill the well |
| During depressed market conditions, a customer may no longer need a rig that is currently under contract or may be able to obtain a comparable rig at a lower daily rate |
| As a result, customers may seek to renegotiate the terms of their existing drilling contracts or avoid their obligations under those contracts |
| In addition, our customers may have the right to terminate existing contracts if we experience 12 _________________________________________________________________ [66]Table of Contents downtime or operational problems above the contractual limit, if the rig is a total loss or in other specified circumstances, and some of our contracts with national oil companies include terms allowing them to terminate contracts without cause, with little or no written notice and without penalty or early termination payments |
| In addition, we could be required to pay penalties, which could be material, if some of our contracts with national oil companies are terminated due to downtime or operational problems |
| Some of our other contracts with customers may be cancelable at the option of the customer upon payment of a penalty, which may not fully compensate us for the loss of the contract |
| Early termination of a contract may result in a rig being idle for an extended period of time |
| The likelihood that a customer may seek to terminate a contract is increased during periods of market weakness |
| If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, our revenues and profitability could be materially reduced |
| Our jackup rigs and some of our lower specification semisubmersible rigs are at a relative disadvantage to higher specification jackup and semisubmersible rigs |
| These higher specification rigs may be more likely to obtain contracts than our lower specification rigs, particularly during market downturns |
| Many of our competitors have jackup fleets with generally higher specification rigs than those in our jackup fleet, and our fleet includes a number of older, lower specification semisubmersible rigs |
| In addition, the announced new construction of rigs includes approximately 90 high specification jackup rigs, semisubmersible rigs and ultra-deepwater drillships |
| Particularly during market downturns when there is decreased rig demand, higher specification rigs may be more likely to obtain contracts than lower specification rigs |
| In the past, our lower specification rigs have been stacked earlier in the cycle of decreased rig demand than many of our competitors’ higher specification rigs and have been reactivated later in the cycle, which has adversely impacted our business and could be repeated in the future |
| In addition, higher specification rigs may be more adaptable to different operating conditions and have greater flexibility to move to areas of demand in response to changes in market conditions |
| Furthermore, in recent years, an increasing amount of exploration and production expenditures have been concentrated in deeper water drilling programs and deeper formations, including deep natural gas prospects, requiring higher specification rigs |
| This trend is expected to continue and could result in a material decline in demand for the lower specification rigs in our fleet |
| Most jackup and submersible rigs can be moved from one region to another, and in this sense the contract drilling market is a global market |
| The supply and demand balance for jackup and semisubmersible rigs may vary somewhat from region to region, because the cost to move a rig is significant, there is limited availability of rig-moving vessels and some rigs are designed to work in specific regions |
| However, significant variations between regions tend not to exist on a long-term basis due to the ability to move rigs |
| Our mat-supported jackup rigs are less capable of managing variable sea floor conditions found in areas outside the Gulf of Mexico and parts of West Africa, India and the Arabian Gulf |
| As a result, our ability to move these rigs to other regions in response to changes in market conditions is limited |
| We rely heavily on a small number of customers and the loss of a significant customer could have a material adverse impact on our financial results |
| Our contract drilling business is subject to the usual risks associated with having a limited number of customers for our services |
| For the year ended December 31, 2005, Petrobras provided 14dtta4prca and Pemex provided 10dtta7prca of our consolidated revenues |
| Our two next largest customers, none of which individually represented more than 10prca of revenues, accounted in the aggregate for 13dtta9prca of our 2005 consolidated revenues |
| For the year ended December 31, 2004, Petrobras and Pemex accounted for 16dtta6prca and 13dtta9prca, respectively, of consolidated revenues |
| Our two next largest customers, neither of which individually represented more than 10prca of revenues, accounted in the aggregate for 17dtta2prca of our 2004 consolidated revenues |
| Our results of operations could be materially adversely affected if any of our major customers terminates its contracts with us, fails to renew its existing contracts or refuses to award new contracts to us |
| 13 _________________________________________________________________ [67]Table of Contents Our debt levels and debt agreement restrictions may limit our liquidity and flexibility in obtaining additional financing and in pursuing other business opportunities |
| As of December 31, 2005, we had dlra1cmam244dtta8 million in long-term debt |
| The level of our indebtedness will have several important effects on our future operations, including: • a significant portion of our cash flow from operations will be dedicated to the payment of interest and principal on such debt and will not be available for other purposes; • covenants contained in our debt arrangements require us to meet certain financial tests, which may affect our flexibility in planning for, and reacting to, changes in our business and may limit our ability to dispose of assets or place restrictions on the use of proceeds from such dispositions, withstand current or future economic or industry downturns and compete with others in our industry for strategic opportunities; and • our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited |
| Our ability to meet our debt service obligations and to reduce our total indebtedness will be dependent upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control |
| Because we have not filed our quarterly report on Form 10-Q for the quarter ended March 31, 2006, we currently are not in compliance with the financial reporting covenants in our indentures governing dlra800 million principal amount of outstanding debt securities |
| There is at least a 30-day cure period following notice from the trustee or the requisite holders of the debt securities |
| If we are not able to file our quarterly report within the applicable cure period, an event of default would be triggered under the indentures |
| Each of these defaults could have a material adverse effect on us |
| We have obtained a waiver from the lenders under our revolving credit facility through June 30, 2006 related to the late filing of our quarterly report |
| We are subject to a number of operating hazards, including those specific to marine operations |
| Our operations are subject to the many hazards customary in the drilling industry, such as blowouts, reservoir damage, loss of production, loss of well control, punchthroughs, craterings, fires and pollution |
| Contract drilling and well servicing require the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and third parties |
| These hazards can cause personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage and suspension of operations |
| Our offshore fleet is also subject to hazards inherent in marine operations, either while on site or during mobilization, such as capsizing, sinking, grounding, collision and damage from severe weather |
| Operations may also be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services, or personnel shortages |
| We customarily provide contract indemnity to our customers for: • claims that could be asserted by us relating to damage to or loss of our equipment, including rigs; • claims that could be asserted by us or our employees relating to personal injury or loss of life; and • legal and financial consequences of spills of industrial waste and other liquids, but only to the extent (1) that the waste or other liquids were in our control at the time of the spill, (2) that our level of culpability is greater than mere negligence or (3) of specified monetary limits |
| Certain areas in and near the Gulf of Mexico are subject to hurricanes and other extreme weather conditions on a relatively frequent basis |
| Our drilling rigs in the Gulf of Mexico may be located in areas that could cause them to be susceptible to damage or total loss by these storms |
| In addition, damage caused by high winds and turbulent seas to our rigs, our shorebases and our corporate infrastructure could potentially cause us to curtail operations for significant periods of time until the damages can be repaired |
| We maintain insurance for injuries to our employees, damage to or loss of our equipment and other insurance coverage for normal business risks, including general liability insurance |
| However, our insurance protection may 14 _________________________________________________________________ [68]Table of Contents not be sufficient or effective under all circumstances or against all hazards to which we may be subject |
| For example, pollution, reservoir damage and environmental risks generally are not fully insurable, and our insurance does not cover lost revenues while our rigs are inactive |
| In addition, some of our primary insurance policies have substantial per occurrence or annual deductibles and/or self-insured aggregate amounts |
| As a result of a number of catastrophic events over the last few years, such as the terrorist attacks on September 11, 2001 and the hurricanes in the Gulf of Mexico in 2004 and 2005, insurance underwriters have increased insurance premiums for many of the coverages historically maintained and have issued general notices of cancellation and significant changes for a wide variety of insurance coverages |
| The oil and natural gas industry in the Gulf of Mexico suffered extensive damage from those hurricanes |
| As a result, our insurance costs will increase significantly after the end of our current policy period in June 2006 |
| In addition, underwriters have imposed an aggregate limit for damage due to named wind storms in the US Gulf of Mexico |
| If storm activity in 2006 is as severe as it was in 2005, insurance underwriters may no longer insure Gulf of Mexico assets against weather-related damage |
| A number of our customers that produce oil and natural gas in the Gulf of Mexico previously maintained business interruption insurance for their production |
| This insurance may cease to be available in the future, which could adversely impact our customers’ business prospects in the Gulf of Mexico and reduce demand for our services |
| The occurrence of a significant event against which we are not fully insured, or of a number of lesser events against which we are insured but are subject to substantial deductibles and/or self-insured amounts, could materially increase our costs and impair our profitability and financial condition |
| We may not be able to maintain adequate insurance at rates or on terms that we consider reasonable or acceptable or be able to obtain insurance against certain risks |
| Rig upgrade, refurbishment, repair and construction projects are subject to risks, including delays and cost overruns, which could have an adverse impact on our available cash resources and results of operations |
| We make significant upgrade, refurbishment and repair expenditures for our fleet from time to time, particularly in light of the aging nature of our rigs |
| Some of these expenditures are unplanned |
| In addition, depending on available opportunities, we may construct rigs for our fleet in the future |
| All of these projects are subject to the risks of delay or cost overruns, including costs or delays resulting from the following: • unexpectedly long delivery times for or shortages of key equipment and materials; • shortages of skilled labor and other shipyard personnel necessary to perform the work; • unforeseen increases in the cost of equipment, labor and raw materials, particularly steel; • unforeseen design or engineering problems; • unanticipated actual or purported change orders; • disputes with shipyards and suppliers; • work stoppages; • financial or other difficulties at shipyards; • adverse weather conditions; and • inability to obtain required permits or approvals |
| Significant cost overruns or delays could materially affect our financial condition and results of operations |
| Additionally, capital expenditures for rig upgrade, refurbishment and construction projects could materially exceed our planned capital expenditures |
| Moreover, our rigs undergoing upgrade, refurbishment and repair may not earn a dayrate during the period they are out of service |
| 15 _________________________________________________________________ [69]Table of Contents We are subject to numerous governmental laws and regulations, including those that may impose significant liability on us for environmental and natural resource damages |
| Many aspects of our operations are subject to US and foreign laws and regulations that may relate directly or indirectly to the contract drilling and well servicing industries, including those requiring us to control the discharge of oil and other contaminants into the environment or otherwise relating to environmental protection |
| Our operations and activities in the United States are subject to numerous environmental laws and regulations, including the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the Comprehensive Environmental Response, Compensation and Liability Act and the International Convention for the Prevention of Pollution from Ships |
| Additionally, other countries where we operate have environmental laws and regulations covering the discharge of oil and other contaminants and protection of the environment in connection with operations |
| Failure to comply with these laws and regulations may result in the assessment of administrative, civil and even criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that may limit or prohibit our operations |
| Laws and regulations protecting the environment have become more stringent in recent years and may in certain circumstances impose strict liability, rendering us liable for environmental and natural resource damages without regard to negligence or fault on our part |
| These laws and regulations may expose us to liability for the conduct of, or conditions caused by, others or for acts that were in compliance with all applicable laws at the time the acts were performed |
| The application of these requirements, the modification of existing laws or regulations or the adoption of new laws or regulations curtailing exploratory or development drilling for oil and natural gas could materially limit future contract drilling opportunities or materially increase our costs or both |
| Our ability to operate our rigs in the US Gulf of Mexico could be restricted or made more costly by government regulation |
| Hurricanes Katrina and Rita caused damage to a number of rigs in the Gulf of Mexico fleet, and rigs that were moved off location by the storms may have done damage to platforms, pipelines, wellheads and other drilling rigs |
| In May 2006, the MMS issued interim guidelines for jackup rig fitness requirements for the 2006 hurricane season, effectively imposing new requirements on the offshore oil and natural gas industry in an attempt to increase the likelihood of survival of jackup rigs and other offshore drilling units during a hurricane |
| The new MMS requirements have resulted in our jackup rigs operating in the US Gulf of Mexico being required to operate with a higher air gap during hurricane season, effectively reducing the water depth in which they can operate |
| The guidelines also provide for enhanced information and data requirements from oil and natural gas companies operating properties in the US Gulf of Mexico |
| The MMS may take other steps that could increase the cost of operations or reduce the area of operations for our jackup rigs, thus reducing their marketability |
| Implementation of new MMS guidelines or regulations may subject us to increased costs and limit the operational capabilities of our rigs |
| A change in tax laws of any country in which we operate could result in a higher tax expense or a higher effective tax rate on our worldwide earnings |
| We conduct our worldwide operations through various subsidiaries |
| Tax laws and regulations are highly complex and subject to interpretation |
| Consequently, we are subject to changing tax laws, treaties and regulations in and between countries in which we operate, including treaties between the United States and other nations |
| Our income tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred |
| A change in these tax laws, treaties or regulations, including those in and involving the United States, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings |
| As required by law, we file periodic tax returns that are subject to review and examination by various revenue agencies within the jurisdictions in which we operate |
| We are currently contesting several tax assessments and may contest future assessments where we believe the assessments are in error |
| We cannot predict or provide assurance as to the ultimate outcome of existing or future tax assessments |
| Increases in our costs, which are unpredictable and fluctuate based on events outside our control, could adversely impact our profitability on those contracts |
| A number of our contracts with our customers for our offshore rigs are on a long-term fixed dayrate basis |
| Generally, costs increase as the business environment for drilling services improves and demand for oilfield equipment and skilled labor increases |
| Long-term fixed dayrate contracts limit our ability to adjust dayrates in response to increased costs |
| As a result, substantial increase in our costs associated with these contracts would adversely impact our profitability and this impact could be material |
| Unionization efforts could increase our costs or limit our flexibility |
| Certain of our employees worldwide work under collective bargaining agreements |
| In addition, we have been subjected to work stoppages in certain countries |
| Additional unionization efforts or work stoppages could materially increase our costs or limit our flexibility |
| We may incur substantial costs associated with workforce reductions |
| In many of the countries in which we operate, our workforce has certain compensation and other rights relating to involuntary terminations arising from our various collective bargaining agreements and from statutory requirements of those countries |
| If we choose to cease operations in one of those countries or if market conditions reduce the demand for our drilling services in such a country, we could incur costs, which may be material, associated with workforce reductions |
| Our ownership interest in two of our high-specification semisubmersible rigs is through a joint venture, which could limit our control over those assets |
| Currently, we hold a 30prca interest in a joint venture company that owns two high-specification semisubmersible rigs, the Pride Portland and the Pride Rio de Janeiro |
| We do not have sole control of the major decisions of the joint venture, such as those relating to drilling contracts for the rigs, debt obligations, capital expenditures and calling for capital contributions, and our joint venture partner may be able to take action without our approval |
| In addition, the rights of our joint venture partner may restrict our ability to sell our interest in the joint venture or in the property owned by the joint venture |
| Our ownership interest in this joint venture also may involve risks not otherwise present with respect to assets owned solely by us, including the possibility that our joint venture partner might become bankrupt, fail to make required capital contributions, have different interests or goals from us or take action contrary to our instructions, requests, policies or objectives |
| Moreover, if the joint venture company does not generate sufficient funds from operations to finance its costs and its debt service obligations, the joint venture partners would, if they choose to maintain the joint venture, need to advance further funds to the joint venture company since the joint venture company would have no alternative source of funds to allow it to make such payments |
| If the joint venture company failed to cover its debt service requirements, a default would occur under the fixed rate notes issued to finance a portion of the construction cost of the two rigs, which notes are guaranteed by the United States Maritime Administration (“MARAD”) |
| MARAD would then be entitled to foreclose on the mortgages related to the Pride Portland and the Pride Rio de Janeiro and take possession of the two rigs |
| Public health threats could have a material adverse effect on our operations and our financial results |
| Public health threats, such as the bird flu, Severe Acute Respiratory Syndrome (SARS), and other highly communicable diseases, outbreaks of which have already occurred in various parts of the world in which we operate, could adversely impact our operations, the operations of our clients and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our services |
| Any quarantine of personnel or inability to access our offices or rigs could adversely affect our operations |
| Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for drilling services caused by public health threats in the future, may materially impact operations and adversely affect our financial results |