| ROWAN COMPANIES INC ITEM 1A RISK FACTORS You should consider carefully the following risk factors, in addition to the other information contained and incorporated by reference in this Form 10-K, before deciding to invest in our common stock |
| Our operations are volatile and heavily dependent upon commodity prices and other factors beyond our control |
| The success of our drilling operations depends heavily upon the condition of the oil and gas industry and the level of offshore drilling activity |
| Demand for our drilling services is vulnerable to periodic declines in drilling 10 _________________________________________________________________ [57]Table of Contents activity that are typically associated with depressed oil and natural gas prices |
| Oil and natural gas prices have historically been very volatile, and our drilling operations have in the past suffered through long periods of weak market conditions |
| Demand for our drilling services also depends on additional factors that are beyond our control, including: • fluctuations in the worldwide demand for oil and natural gas; • the willingness and ability of the Organization of Petroleum Exporting Countries, or OPEC, to limit production levels and influence prices; • political and military conflicts in oil-producing areas and the effects of terrorism; • the level of production in non-OPEC countries; • laws, regulations and policies of various governments regarding exploration and development of their oil and natural gas reserves; • advances in exploration and development technology; and • further consolidation of our customer base |
| Our drilling operations will be adversely affected by future declines in oil and natural gas prices, but we cannot predict the extent of that effect |
| Nor can we assure you that a reduction in offshore drilling activity will not occur for other reasons |
| Our manufacturing operations, though less volatile, are also dependent on commodity prices which affect demand for rigs and rig components and mining and timber equipment |
| We have incurred losses recently and over prolonged periods in the past, a circumstance that could occur again in the future |
| In 2002, we experienced a 19prca decline in revenues and incurred a loss from operations of dlra26dtta1 million |
| During the 1985-1995 period, we consistently incurred net losses that totaled more than dlra360 million |
| The inherent volatility of the businesses in which we operate makes it likely that we will incur additional losses in the future |
| Our markets are highly competitive, which may make it difficult for us to maintain satisfactory price levels |
| Our drilling and manufacturing markets are highly competitive, and no single participant is dominant |
| In our drilling markets, drilling contracts are often awarded on a competitive bid basis, with intense price competition frequently being the primary factor determining which qualified contractor is awarded the job, although rig availability and location, the contractor’s safety and operational record and the quality and technical capability of service and equipment are also factors |
| Additionally, recent mergers among oil and natural gas exploration and production companies have reduced the number of available customers, which may further increase competition in our drilling markets |
| Our manufacturing markets are also characterized by vigorous competition among several competitors |
| Some of our competitors possess greater financial resources than we do |
| We may have to reduce our prices in order to remain competitive in our markets, which could have an adverse effect on our operating results |
| The drilling history has historically been cyclical, and periods of low demand could have an adverse effect on our operating results |
| The contract drilling industry has historically been cyclical, with periods of high demand, short rig supply and high day rates, followed by periods of lower demand, excess rig supply and low day rates |
| Although demand for drilling services is currently strong, there can be no assurances that demand will not decline in future periods |
| Strong demand may lead to an increase in new rig construction and reactivation of cold-stacked rigs, which could lead to increased price competition |
| We believe there are currently approximately 50 competitive jack-ups under construction or contracted for construction worldwide |
| There can be no assurances that the market will be able to fully absorb the addition of these new rigs to the worldwide fleet, and the addition of these rigs could lead to decreased rig utilization, increased price competition and lower day rates |
| Prolonged periods of low rig utilization and day rates 11 _________________________________________________________________ [58]Table of Contents require us to enter into lower rate contracts or idle rigs, which could have an adverse effect on our operating results and cash flows |
| Prolonged periods of low rig utilization and day rates could also 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 their carrying value may not be recoverable |
| Most of our drilling contracts are fixed day rate contracts, and increases in our operating costs could have an adverse effect on the profitability of those contracts |
| However, many of our operating costs are unpredictable and vary based on events beyond our control |
| Our gross margins on these fixed day rate contracts will vary based on fluctuations in our operating costs during the terms of these contracts |
| If our costs increase or we encounter unforeseen costs, we may not be able to recover such costs from our customers, which could adversely affect our financial position, results of operations and cash flows |
| If operating conditions deteriorate, our results of operations would suffer and working capital may not be adequate to finance our ongoing fleet expansion program |
| Because outside financing may not be available, we could be forced to suspend rig construction activities |
| We have in progress an offshore fleet expansion program under which we plan to spend approximately dlra515 million over the 2006-2009 period towards the completion of our third and fourth Tarzan Class jack-up rigs and the construction of two new 240C rigs |
| Another dlra257 million is committed in 2006 toward the construction of 12 new land rigs and for ongoing upgrades to existing equipment and facilities |
| We currently have no available lines of credit, thus all of our expected capital expenditures over the next two to three years may need to be internally financed through working capital or operating cash flows |
| If we experience cost overruns or delays in our capital projects or if we should need additional financing and are unable to obtain it at commercially favorable rates, we could experience liquidity problems |
| Rig upgrade, enhancement and new construction projects are subject to risks which could cause delays or cost overruns and adversely affect our financial condition and results of operations |
| As noted above, we currently have a substantial fleet expansion program in progress |
| These projects and other projects of this type are subject to risks of delay or cost overruns inherent in any large construction project from numerous factors, including the following: • shortages of equipment, materials or skilled labor; • unscheduled delays in the delivery of ordered materials and equipment; • inability to obtain required permits or approvals; • unanticipated cost increases; • adverse weather conditions; • design or engineering problems; and • work stoppages |
| Significant cost overruns or delays could adversely affect our financial condition of operations |
| Additionally, failure to complete a project on time may result in the delay of revenue from that rig, which also could adversely affect our financial condition, results of operations and cash flows |
| Our Super Gorilla and Tarzan Class offshore jack-up drilling rigs are pledged as security under our government-guaranteed debt arrangements |
| If operating conditions deteriorate and if market conditions were to remain depressed for a long period of time, our results of operations would suffer and working capital and other financial resources may not be available or 12 _________________________________________________________________ [59]Table of Contents adequate to service our outstanding debt |
| Our four Super Gorilla class jack-ups and our two Tarzan Class jack-ups are pledged as security under our government-guaranteed debt arrangements |
| If we were unable to service our debt, it is possible that these assets could be removed from our fleet, in which case our ability to generate revenues would be significantly reduced |
| Our results of operations will be adversely affected if we are unable to secure drilling contracts for our rigs on economically favorable terms |
| The drilling markets in which we compete frequently experience significant fluctuations in the demand for drilling services, as measured by the level of exploration and development expenditures, and the supply of capable drilling equipment |
| In response to fluctuating market conditions, we can, as we have done in the past, relocate drilling rigs from one geographic area to another, but only when such moves are economically justified over the longer term |
| If demand for our rigs declines, our rig utilization and day rates are generally adversely affected |
| The expansion of our drilling fleet increases our daily operating costs |
| We may be unable to secure economical drilling contracts for our new rigs, in which case their delivery will negatively impact our operating results |
| If our customers terminate or seek to renegotiate our drilling contracts, our results of operations may be adversely affected |
| Some of our drilling contracts are cancelable by the customer upon specific notice by the customer, or upon the occurrence of events beyond our control, such as the loss or destruction of the rig or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment |
| Although our contracts may require the customer to make an early termination payment upon cancellation of the contract, such payment may not be sufficient to 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 |
| Our revenues, results of operations and cash flows may be adversely affected by customers’ early termination of contracts, especially if we are unable to re-contract the affected rig within a short period of time |
| Additionally, during adverse market conditions, a customer may be able to obtain a comparable rig at a lower daily rate, and as a result, may seek to renegotiate the terms of their existing drilling contract with us |
| The renegotiation of a number of our drilling contracts could adversely affect our revenues, results of operations and cash flows |
| Failure to obtain or retain highly skilled personnel could adversely affect our operations |
| We require highly skilled personnel to operate and provide technical services and support for our businesses |
| Competition for skilled and other labor required for our drilling operations has increased in recent years as the number of rigs activated or added to worldwide fleets has increased |
| If this expansion continues and the demand for drilling services remains strong or increases, shortages of qualified personnel could develop, creating upward pressure on wages and making it more difficult to staff and service our rigs, which could adversely affect our operating results |
| Many of our drilling rigs are subject to damage or destruction by severe weather |
| Much of the Gulf of Mexico, the North Sea and offshore eastern Canada experience hurricanes or other extreme weather conditions on a relatively frequent basis |
| Many of our offshore drilling rigs are located in these areas and are thus subject to damage or destruction by these storms |
| Damage caused by high winds and turbulent seas could cause us to suspend operations on such drilling rigs for significant periods of time until the damage can be repaired |
| Additionally, even if our drilling rigs are not directly damaged by such storms, we may still experience disruptions in our operations due to damage to our customer’s platforms and other related facilities in these areas |
| During Hurricanes Katrina and Rita in 2005, we lost four rigs and another was significantly damaged |
| Future storms could result in the loss or damage of additional rigs, which could adversely affect our financial condition, results of operations and cash flows |
| 13 _________________________________________________________________ [60]Table of Contents We are subject to operating risks such as blowouts and well fires that could result in environmental damage, property loss, personal injury and death, some of which may not be covered by insurance or recoverable indemnification |
| Our drilling operations are subject to many hazards that could increase the likelihood of accidents |
| Accidents can result in: • costly delays or cancellations of drilling operations; • serious damage to or destruction of equipment; • personal injury or death; • significant impairment of producing wells, leased properties or underground geological formations; and • major environmental damage |
| Our offshore drilling operations are also subject to marine hazards, either at offshore sites or while drilling equipment is under tow, such as vessel capsizings, collisions or groundings |
| In addition, raising and lowering jack-up rigs and drilling into high-pressure formations are complex, hazardous activities and we frequently encounter problems |
| Our manufacturing processes could pollute the air, land, and inland waters, and the products we manufacture could be implicated in lawsuits alleging environmental harm, property loss, personal injury and death |
| We have had accidents in the past demonstrating some of the hazards described above, including high pressure drilling accidents resulting in lost or damaged drilling formations and towing accidents resulting in lost drilling equipment |
| Any similar events could yield future operating losses and have significant adverse impact on our business |
| 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 |
| 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 2004 and 2005, 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 and other hazards, 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 costs for available insurance coverage which may impose higher deductibles and limit maximum aggregated recoveries for certain perils, such as hurricane related windstorm damage or loss |
| We may be required to modify our risk management program in response to changes in the insurance market, including increased risk retention |
| Consistent with standard industry practice, we typically obtain contractual indemnification from our customers whereby such customers generally agree to protect and indemnify us for liabilities resulting from various hazards associated with the drilling industry |
| However, there can be no assurance that our customers will be financially able to meet these indemnification obligations, and the failure of a customer to meet such obligations, the failure of one or more of our insurance providers to meet claim obligations, or losses or liabilities resulting from unindemnified, uninsured or underinsured events could have a material adverse effect on our financial position, results of operations and cash flows |
| Government regulations and environmental risks, which reduce our business opportunities and increase our operating costs, might worsen in the future |
| Government regulations dictate design and operating criteria for drilling vessels, determine taxation levels to which we (and our customers) are subject, control and often limit access to potential markets and impose extensive requirements concerning employee safety, environmental protection and pollution control |
| Environmental regulations, in particular, prohibit access to some markets and make others less economical, increase equipment and personnel costs and often impose liability without regard to negligence or fault |
| In addition, governmental regulations may discourage our customers’ activities, reducing demand for our products and services |
| We may 14 _________________________________________________________________ [61]Table of Contents be liable for damages resulting from pollution of offshore waters and, under United States regulations, must establish financial responsibility in order to drill offshore |
| In response to the significant damage to offshore rigs in recent years caused by Gulf of Mexico hurricanes, various industry and regulatory organizations are considering additional operating constraints during the tropical storm season |
| Such constraints, if required, could limit the capability of many of the Company’s rigs to operate at certain locations in the Gulf of Mexico during a significant portion of each year |
| Depending upon the Company’s ability to obtain work elsewhere, the impact of these additional regulations could be to reduce the Company’s ability to generate drilling revenues |
| Anti-takeover provisions in our Certificate of Incorporation, bylaws and stockholder rights plan could make it difficult for holders of our common stock to receive a premium for their shares upon a change of control |
| Holders of the common stock of acquisition targets may receive a premium for their shares upon a change of control |
| Delaware law and the following provisions, among others, of our Certificate of Incorporation, bylaws and rights plan could have the effect of delaying or preventing a change of control and could prevent holders of our common stock from receiving such a premium: • The affirmative vote of 80prca of the outstanding shares of our capital stock is required to approve business combinations with any related person that have not been approved by our board of directors |
| We are also subject to a provision of Delaware corporate law that prohibits us from engaging in a business combination with any interested stockholder for three years from the date that person became an interested stockholder unless specified conditions are met |
| • Special meetings of stockholders may not be called by anyone other than our board of directors, its chairman, its executive committee or our president or chief executive officer |
| • Our board of directors is divided into three classes whose terms end in successive years, so that less than a majority of our board comes up for election at any annual meeting |
| • Our board of directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the voting rights and other privileges of these shares without any vote or action by our stockholders |
| • We have adopted a stockholder rights plan that provides our stockholders rights to purchase junior preferred stock in certain circumstances, whereby the ownership of Rowan shares by a potential acquirer can be significantly diluted by the sale at a significant discount of additional Rowan shares to all other stockholders, which could discourage unsolicited acquisition proposals |