Atwood Oceanics, Inc. (which together with its subsidiaries is identified as
the Company, we or our, unless the context requires otherwise) is engaged in the
international offshore drilling and completion of exploratory and developmental oil and gas
wells and related support, management and consulting services. We are headquartered in
Houston, Texas, USA. Atwood Oceanics, Inc. was organized in 1968 as a Texas corporation and
commenced operations in 1970.
During our thirty-nine year history, the majority of our drilling units have
operated outside of United States waters, and we have conducted drilling operations in most
of the major offshore exploration areas of the world. Our current worldwide operations
include eight premium offshore mobile drilling units located in six regions of the world
offshore Southeast Asia, offshore Africa, offshore India, offshore Australia, the Black Sea
and the U.S. Gulf of Mexico. Approximately 93%, 93%, and 93% of our contract revenues were
derived from foreign operations in fiscal years 2007, 2006 and 2005, respectively. The
submersible RICHMOND is our only drilling unit currently working in United States waters.
We support our operations from our Houston headquarters and offices currently located in
Australia, Malaysia, Malta, Egypt, Indonesia, Singapore and the United Kingdom. For
information relating to the contract revenues, operating income and identifiable assets
attributable to specific geographic areas of operations, see Note 13 of the Notes to
Consolidated Financial Statements contained in our Annual Report to Shareholders for fiscal
year 2007, incorporated by reference herein.
The following table presents our wholly-owned and operating rig fleet as of
November 27, 2007:
Rig Name
|
Rig Type
|
Upgraded
|
Water Depth
Rating (feet)
|
|
|
|
|
ATWOOD EAGLE
|
Semisubmersible
|
2000/2002
|
5,000
|
ATWOOD HUNTER
|
Semisubmersible
|
1997/2001
|
5,000
|
ATWOOD FALCON
|
Semisubmersible
|
1998/2006
|
5,000
|
ATWOOD SOUTHERN CROSS
|
Semisubmersible
|
1997/2006
|
2,000
|
SEAHAWK
|
Semisubmersible TenderAssist
|
1992/1999/2006
|
600
|
ATWOOD BEACON
|
Jack-up
|
2003
(1)
|
400
|
VICKSBURG
|
Jack-up
|
1998
|
300
|
RICHMOND
|
Submersible
|
2000/2002/2007
|
70
|
|
(1)
|
The ATWOOD BEACON was constructed in 2003.
|
When necessary, we update and upgrade our fleet in order to maintain
premium, modern equipment. In fiscal year 1997, we commenced an internal upgrade program of
all of our active drilling units. Collectively, since fiscal year 1997, we have invested
approximately $400 million in upgrading seven offshore mobile drilling units in connection
with our upgrade program. In August 2003, our eighth drilling unit, the ATWOOD BEACON, an
ultra-premium, jack-up rig, commenced its initial drilling contract following completion of
its construction and commissioning in early August 2003. This drilling unit was constructed
on time and on budget at a cost of approximately $120 million. We have a ninth drilling
unit, the ATWOOD AURORA, another ultra-premium, jack-up rig, under construction in
Brownsville, Texas, with scheduled delivery in October/November 2008. The total
construction cost of this drilling unit (including capitalized interest) is expected to be
approximately $160 million.
All of our currently active drilling units have contractual dayrate
commitments that are the highest in their respective histories. Currently, we have
approximately 87% and 33% of our available rig days contracted for fiscal years 2008 and
2009, respectively. For many years, one of our strategic focuses has been maintaining high
equipment utilization. We had a 100% equipment utilization rate in each of fiscal years
2007 and 2006 and have averaged over 90% utilization over the last ten years. Today,
virtually all worldwide offshore drilling areas have strong market fundamentals, with high
utilization of both floating as well as bottom supported drilling units. Despite the
increase in operating costs for fiscal year 2007, our operating results significantly
increased for fiscal year 2007 compared to fiscal year 2006. Although we anticipate a
continuing trend for increases in operating costs during the next fiscal year, with our
backlog of contracted days providing increasing revenue expectations, we anticipate that
revenues, operating cash flows and earnings for fiscal year 2008 will reflect a significant
improvement over fiscal year 2007 operating results, and we expect our 2008 operating
results to be the highest in our history.
3
OFFSHORE DRILLING EQUIPMENT
Each type of drilling rig is uniquely designed for different purposes and
applications, for operations in different water depths, bottom conditions, environments and
geographical areas, and for different drilling and operating requirements. The following
descriptions of the various types of drilling rigs we own illustrate the diversified range
of applications of our rig fleet.
Semisubmersible Rigs.
Each semisubmersible
drilling unit has two hulls, the lower of which is capable of being flooded. Drilling
equipment is mounted on the main hull. After the drilling unit is towed to location, the
lower hull is flooded, lowering the entire drilling unit to its operating draft, and the
drilling unit is anchored in place. On completion of operations, the lower hull is
deballasted, raising the entire drilling unit to its towing draft. This type of drilling
unit is designed to operate in greater water depths than a jack-up and in more severe sea
conditions than other types of drilling units. Semisubmersible units are generally more
expensive to operate than jack-up drilling rigs and are often limited in the amount of
supplies that can be stored on board.
Semisubmersible Tender Assist Rigs.
Semisubmersible tender assist rigs operate like a semisubmersible except
that their drilling equipment is temporarily installed on permanently constructed offshore
support platforms. Semisubmersible rigs provide crew accommodations, storage facilities and
other support for drilling operations.
Jack-up Drilling Rigs.
A jack-up drilling rig
contains all of the drilling equipment on a single hull designed to be towed to a well
site. Once on location, legs are lowered to the sea floor and the unit is raised out of the
water by jacking the hull up the legs. On completion of the well, the unit is jacked down,
and towed to the next location. A jack-up drilling rig can operate in more severe sea and
weather conditions than a drillship and is less expensive to operate than a
semisubmersible. However, because it must rest on the sea floor, a jack-up cannot operate
in water as deep as that in which a semisubmersible unit can operate. A jack-up drilling
rig is a bottom supported rig.
Submersible Drilling Rigs.
The submersible
drilling rig we own has two hulls, the lower being a mat, which is capable of being
flooded. Drilling equipment and crew accommodations are located on the main hull. After the
drilling unit is towed to its location, the lower hull is flooded, lowering the entire unit
to its operating draft at which it rests on the sea floor. On completion of operations, the
lower hull is deballasted, raising the entire unit to its towing draft. This type of
drilling unit is designed to operate in shallow water depths ranging from 9 to 70 feet and
can operate in moderately severe sea conditions. Although drilling units of this type are
less expensive to operate, like a jack-up drilling rig, they cannot operate in water as
deep as that in which a semisubmersible rig can operate. A submersible drilling rig is a
bottom supported unit.
DRILLING CONTRACTS
We obtain the contracts under which we operate our units either through
individual negotiation with the customer or by submitting proposals in competition with
other contractors. Our contracts vary in their terms and conditions. The initial term of
contracts for our owned and/or managed units has ranged from the length of time necessary
to drill one well to several years and is generally subject to early termination in the
event of a total loss of the drilling unit, a force majeure event, excessive equipment
breakdown or failure to meet minimum performance criteria. It is not unusual for contracts
to contain renewal provisions, which in time of weak market conditions are usually at the
option of the customer; while in time of strong market demand, like today, are usually
mutually agreeable.
The rate of compensation specified in each contract depends on the nature of
the operation to be performed, the duration of the work, the amount and type of equipment
and services provided, the geographic areas involved, market conditions and other
variables. Generally, contracts for drilling, management and support services specify a
basic rate of compensation computed on a dayrate basis. Such agreements generally provide
for a reduced dayrate payable when operations are interrupted by equipment failure and
subsequent repairs, field moves, adverse weather conditions or other factors beyond our
control. Some contracts also provide for revision of the specified dayrates in the event of
material changes in certain items of cost. Any period during which a vessel is not earning
a full operating dayrate because of the above conditions or because the vessel is idle and
not on contract will have an adverse effect on operating profits. An over-supply of
drilling rigs in any market area can adversely affect our ability to employ our drilling
units. Our active rig utilization, which excludes contractual downtime for rigs upgraded,
for fiscal years 2007, 2006 and 2005 was 100%, 100% and 98%, respectively.
Of our current drilling contracts, five of our drilling units have contract
terms that extend to the end of fiscal year 2008 or beyond. The ATWOOD EAGLE's contract in
Australia extends into fiscal year 2010. The ATWOOD FALCON,
4
ATWOOD
BEACON and VICKSBURG contracts extend into fiscal year 2009. The current SEAHAWK contract
extends to the end of fiscal year 2008. The current ATWOOD SOUTHERN CROSS and ATWOOD HUNTER
contracts are expected to terminate in February 2008 and July 2008, respectively, with both
rigs expected to be recontracted at increased dayrates. Even though the RICHMOND currently
has a one well contract commitment, we expect that this rig will remain highly utilized;
however, we expect its dayrate to be down from its current one well commitment of $80,000
to the mid to high $60,000.
|
We currently expect the following zero rate downtime in
fiscal year 2008:
|
RIG
|
|
ESTIMATED QUARTER IN WHICH DOWNTIME COULD OCCUR
|
|
ESTIMATED DAYS AT ZERO RATE
|
|
|
|
|
|
ATWOOD HUNTER
|
|
End of first quarter to beginning of second
quarter
|
|
15 to 20 Days
|
ATWOOD EAGLE
|
|
First Quarter
|
|
15 Days
|
ATWOOD FALCON
|
|
Fourth quarter of fiscal year 2008 or first quarter of
fiscal year 2009
|
|
5 to 10 Days
|
ATWOOD SOUTHERN CROSS
|
|
Second Quarter
|
|
4 to 10 Days
|
ATWOOD BEACON
|
|
Second Quarter
|
|
3 Days
|
RICHMOND
|
|
First Quarter
|
|
70 Days
|
In addition to the above planned downtime, we are always at risk for unplanned downtime.
Thus far in the first quarter of fiscal year 2008, the SEAHAWK and the ATWOOD HUNTER have
incurred sixteen (16) days and three (3) days, respectively of unplanned
downtime. Maintaining high equipment utilization in up, as well as down, cycles is a big
factor in generating cash to satisfy current and future obligations.
For long moves of drilling equipment, we attempt to obtain from our
customers either a lump sum or a dayrate as mobilization compensation for expenses incurred
during the period in transit. In todays strong market environment, we are able to receive a
dayrate as mobilization compensation; however, a surplus of certain types of units, either
worldwide or in particular operating areas, can result in our acceptance of a contract
which provides only partial or no recovery of relocation costs. Additionally, under such a
contract, we may not make any profit during the relocation of a rig. We can give no
assurance that we will receive full or partial recovery of any future relocation costs
beyond that for which we have already contracted.
Operation of our drilling equipment is subject to the offshore drilling
requirements of petroleum exploration companies and agencies of foreign governments. These
requirements are, in turn, subject to fluctuations in government policies, world demand and
prices for petroleum products, proved reserves in relation to such demand and the extent to
which such demand can be met from onshore sources.
The majority of our contracts are denominated in United States dollars, but
occasionally a portion of a contract is payable in local currency. To the extent there is a
local currency component in a contract, we attempt to match revenue in the local currency
to operating costs paid in the local currency such as local labor, shore base expenses, and
local taxes, if any.
INSURANCE AND RISK MANAGEMENT
Our operations are subject to the usual hazards associated
with the drilling of oil and gas wells, such as blowouts, explosions and fires. In
addition, our equipment is subject to various risks particular to our industry which we
seek to mitigate by maintaining insurance. These risks include leg damage to jack-ups
during positioning, capsizing, grounding, collision and damage from severe weather
conditions.
5
Any of
these risks could result in damage or destruction of drilling rigs and oil and gas wells,
personal injury and property damage, suspension of operations or environmental damage
through oil spillage or extensive, uncontrolled fires. Therefore, in addition to general
business insurance policies, we maintain the following insurance relating to our rigs and
rig operations: hull and machinery, loss of hire, builders risk, cargo, war risks,
protection and indemnity, and excess liability, among others.
Our operations are also subject to disruption due to terrorism. As a result
of significant losses incurred by the insurance industry due to terrorism, offshore
drilling rig accidents, damages from hurricanes and other events, we have experienced
increases in premiums for certain insurance coverages. Although we believe that we are
adequately insured against normal and foreseeable risks in our operations in accordance
with industry standards, such insurance may not be adequate to protect us against liability
from all consequences of well disasters, marine perils, extensive fire damage, damage to
the environment or disruption due to terrorism. To date, we have not experienced difficulty
in obtaining insurance coverage, although we can provide no assurance as to the future
availability of such insurance or the cost thereof. The occurrence of a significant event
against which we are not adequately insured could have a material adverse effect on our
financial position. See also Risk Factors in Item 1A.
CUSTOMERS
During fiscal year 2007, we performed operations for 15 customers. Because
of the relatively limited number of customers for which we can operate at any given time,
revenues from 3 different customers amounted to 10% or more of our revenues in fiscal year
2007 as indicated below:
Customer
|
|
Percentage of Revenues
|
Woodside Energy Ltd.
|
|
17%
|
BHP Billiton Petroleum Pty
|
|
13%
|
Sarawak Shell Bhd.
|
|
13%
|
Our business operations are subject to the risks associated with a business
having a limited number of customers for our products or services, and a decrease in the
drilling programs of these customers in the areas where we are employed may adversely
affect our revenues and, therefore, our results of operations and cash flows.
COMPETITION
We compete with several international offshore drilling contractors, most of
which are substantially larger than we are and which possess appreciably greater financial
and other resources. The offshore drilling industry is very competitive, with no single
offshore drilling contractor being dominant. Thus, there is competition in securing
available offshore drilling contracts.
Price competition is generally the most important factor in the offshore
drilling industry; however, when there is high worldwide utilization of equipment, as
currently exists, rig availability and suitability become more important factors in
securing contracts than price. The technical capability of specialized drilling equipment
and personnel at the time and place required by customers are also important. Other
competitive factors include work force experience, rig suitability, efficiency, condition
of equipment, safety performance, reputation and customer relations. We believe that we
compete favorably with respect to these factors.
INDUSTRY TRENDS
The performance of the offshore drilling industry is largely determined by
basic supply and demand for available equipment. Periods of high demand and high dayrates
are often followed by periods of low demand and low dayrates. Offshore drilling contractors
can mobilize rigs from one region of the world to another, can cold stack rigs (taking them
out of service) or reactivate cold stacked rigs in order to adjust supply of existing
equipment in various markets to meet demand. The market is highly cyclical and is typically
driven by general economic activity and changes in actual or anticipated oil and
6
gas
prices. Generally, sustained high energy prices translate into increased exploration and
production spending by oil and gas companies, which in turn results in increased drilling
activity and demand for equipment like ours.
The offshore markets where we currently operate, offshore Southeast Asia,
offshore Africa, offshore India, offshore Australia, the Black Sea, and shallow waters in
the U.S. Gulf of Mexico, offer the potential for continuing high utilization. We expect
demand for all of our drilling units to continue to be strong due to demand for oil and gas
in their respective regions, and expect significant growth in demand for oil and gas driven
by Chinas and Indias rapidly expanding economies.
INTERNATIONAL OPERATIONS
The large majority of our operations are in foreign jurisdictions, which we
have historically found to be more stable in market terms. We believe international
operations provide a better opportunity than domestic operations for attractive contracts
and returns over the longer term. Since 1970, we have operated offshore Southeast Asia,
offshore Australia, in the Far East, in the Mediterranean Sea, in the Arabian Gulf, in the
Red Sea, in the Black Sea, offshore India, offshore Papua New Guinea, offshore Vietnam,
offshore East and West Africa, offshore Central and South America, offshore Chinaand in the
U.S. Gulf of Mexico. Currently, we have only one rig working in the U.S. Gulf of Mexico. We
have foreign offices currently located in Australia, Malaysia, Malta, Egypt, Indonesia,
Singapore and the United Kingdom.
Virtually all of our tax
provision for fiscal years 2005, 2006 and 2007 relates to taxes in foreign jurisdictions.
As a result of working in foreign jurisdictions, we earned a high level of operating income
in certain nontaxable and deemed profit tax jurisdictions which significantly reduced our
effective tax rate for the current fiscal year when compared to the United States statutory
rate. Our effective tax rate for fiscal year 2007 was 15%. Excluding any discrete items
that may occur, we expect our effective tax rate to be approximately 15% for fiscal year
2008. We do not record federal income taxes on the undistributed earnings of our
foreign subsidiaries that we consider to be permanently reinvested in foreign operations.
The cumulative amount of such undistributed earnings was approximately $128 million at
September 30, 2007. It is not practicable to estimate the amount of any deferred tax
liability associated with the undistributed earnings. If these earnings were to be remitted
to us, any United States income taxes payable would be substantially reduced by foreign tax
credits generated by the repatriation of the earnings. Such foreign tax credits totaled
approximately $57 million at September 30, 2007.
EMPLOYEES
We currently employ approximately 900 persons in our domestic and foreign
operations. In connection with our foreign drilling operations, we are often required by
the host country to hire substantial portions of our work force in that country and, in
some cases, these employees are represented by foreign unions. To date, we have experienced
little difficulty in complying with such requirements, and our drilling operations have not
been significantly interrupted by strikes or work stoppages. Our success depends to a
significant extent upon the efforts and abilities of our executive officers and other key
management personnel. There is no assurance that these individuals will continue in such
capacity for any particular period of time.
ENVIRONMENTAL REGULATION
The transition zone and shallow water areas of the U.S. Gulf of Mexico are
ecologically sensitive. Environmental issues have led to higher drilling costs, a more
difficult and lengthy well permitting process and, in general, have adversely affected
decisions of oil and gas companies to drill in these areas. In the United States,
regulations applicable to our operations include regulations controlling the discharge of
materials into the environment, requiring removal and cleanup of materials that may harm
the environment, or otherwise relating to the protection of the environment. For example,
as an operator of a mobile offshore drilling unit in navigable United States waters and
some offshore areas, we may be liable for damages and costs incurred in connection with oil
spills or other unauthorized discharges of chemicals or wastes resulting from or related to
those operations. Laws and regulations protecting the environment have become more
stringent, and may in some cases impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such person. Some
of these laws and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts which were in compliance with all applicable laws at the time
they were performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on our financial position, results of
operations or cash flows.
The U.S. Federal Water Pollution Control Act of 1972, commonly referred to
as the Clean Water Act, prohibits the discharge of specified substances into the navigable
waters of the United States without a permit. The regulations implementing the Clean Water
Act require permits to be obtained by an operator before specified exploration activities
occur. Offshore facilities must also prepare plans addressing spill prevention control and
countermeasures. Violations of monitoring, reporting and permitting requirements can result
in the imposition of civil and criminal penalties.
7
The U.S. Oil Pollution Act of 1990, or OPA, and related regulations impose a
variety of requirement on responsible parties related to the prevention of oil spills and
liability for damages resulting from such spills. Few defenses exist to the liability
imposed by OPA, and the liability could be substantial. Failure to comply with ongoing
requirements or inadequate cooperation in the event of a spill could subject a responsible
party to civil or criminal enforcement action. We have taken all steps necessary to comply
with this law, and have received a Certificate of Financial Responsibility (Water
Pollution) from the U.S. Coast Guard. Our operations in United States waters are also
subject to various other environmental regulations regarding pollution, and we have taken
steps to ensure compliance with those regulations.
The U.S. Outer Continental Shelf Lands Act authorizes regulations relating
to safety and environmental protection applicable to lessees and permittees operating on
the outer continental shelf. Included among these are regulations that require the
preparation of spill contingency plans and establish air quality standards for certain
pollutants, including particulate matter, volatile organic compounds, sulfur dioxide,
carbon monoxide and nitrogen oxides. Specific design and operational standards may apply to
outer continental shelf vessels, rigs, platforms, vehicles and structures. Violations of
lease conditions or regulations related to the environment issued pursuant to the U.S.
Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties,
as well as potential court injunctions curtailing operations and canceling leases. Such
enforcement liabilities can result from either governmental or citizen
prosecution.
The U.S. Comprehensive Environmental Response, Compensation, and Liability
Act, or CERCLA, also known as the Superfund law, imposes liability without regard to fault
or the legality of the original conduct on some classes of persons that are considered to
have contributed to the release of a hazardous substance into the environment. Such persons
include the owner or operator of a facility where a release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at a particular
site. Persons who are or were responsible for releases of hazardous substances under CERCLA
may be subject to joint and several liability for the cost of cleaning up the hazardous
substances that have been released into the environment and for damages to natural
resources. It is also not uncommon for third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment.
OTHER
GOVERNMENTAL REGULATION
Our non-United States contract drilling operations are subject to various
laws and regulations in the countries in which we operate, including laws and regulations
relating to the importation of and operation of drilling units, currency conversions and
repatriation, oil and gas exploration and development, taxation of offshore earnings and
earnings of expatriate personnel, the use of local employees and suppliers by foreign
contractors and duties on the importation and exportation of drilling units and other
equipment. Governments in some foreign countries have become increasingly active in
regulating and controlling the ownership of concessions and companies holding concessions,
the exploration for oil and gas and other aspects of the oil and gas industries in their
countries. In some areas of the world, this governmental activity has adversely affected
the amount of exploration and development work done by major oil and gas companies and may
continue to do so. Operations in less developed countries can be subject to legal systems
that are not as mature or predictable as those in more developed countries, which can lead
to greater uncertainty in legal matters and proceedings.
Our worldwide operations are also subject to a variety of laws and
regulations designed to improve safety in the businesses in which we operate. International
conventions, including Safety of Life at Sea, also referred to as SOLAS, and the Code for
Construction of Mobile Offshore Drilling Units, also referred to as the MODU CODE,
generally are applicable to our offshore operations. Historically, we have made significant
capital expenditures and incurred additional expenses to ensure that our equipment complies
with applicable local and international health and safety regulations. Our future efforts
to comply with these regulations and standards may increase our costs and may affect the
demand for our services by influencing energy prices or limiting the areas in which we may
drill.
Although significant capital expenditures may be required to comply with
these governmental laws and regulations, such compliance has not, to date, materially
adversely affected our earnings, cash flows or competitive position.
SECURITIES LITIGATION SAFE HARBOR STATEMENT
Statements included in this report and the documents incorporated herein by
reference which are not historical facts (including any statements concerning plans and
objectives of management for future operations or economic performance, or assumptions
related thereto) are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition, we and our representatives may from
to time to time make other oral or written statements which are also forward-looking
statements.
These forward-looking statements are made based upon managements current
plans, expectations, estimates, assumptions and beliefs concerning future events impacting
us and therefore involve a number of risks and uncertainties. We caution that
forward-looking statements are not guarantees and that actual results could differ
materially from those expressed or implied in the forward-looking statements.
8
Important factors that could cause our actual results of operations,
financial condition or cash flows to differ include, but are not necessarily limited
to:
|
•
|
our dependence on the oil and gas industry;
|
|
•
|
the operational risks involved in drilling for oil and
gas;
|
|
•
|
changes in rig utilization and dayrates in response to the
level of activity in the oil and gas industry, which is significantly
affected by indications and expectations regarding the level and volatility
of oil and gas prices, which in turn are affected by such things as
political, economic and weather conditions affecting or potentially
affecting regional or worldwide demand for oil and gas, actions or
anticipated actions by OPEC, inventory levels, deliverability constraints,
and future market activity;
|
|
•
|
the extent to which customers and potential customers
continue to pursue deepwater drilling;
|
|
•
|
exploration success or lack of exploration success by our
customers and potential customers;
|
|
•
|
the highly competitive and cyclical nature of our business,
with periods of low demand and excess rig availability;
|
|
•
|
the impact of the war with Iraq or other military
operations, terrorist acts or embargoes elsewhere;
|
|
•
|
our ability to enter into and the terms of future drilling
contracts;
|
|
•
|
the availability of qualified personnel;
|
|
•
|
our failure to retain the business of one or more
significant customers;
|
|
•
|
the termination or renegotiation of contracts by
customers;
|
|
•
|
the availability of adequate insurance at a reasonable
cost;
|
|
•
|
the occurrence of an uninsured loss;
|
|
•
|
the risks of international operations, including possible
economic, political, social or monetary instability, and compliance with
foreign laws;
|
|
•
|
the effect public health concerns could have on our
international operations and financial results;
|
|
•
|
compliance with or breach of environmental laws;
|
|
•
|
the incurrence of secured debt or additional unsecured
indebtedness or other obligations by us or our subsidiaries;
|
|
•
|
the adequacy of sources of liquidity;
|
|
•
|
currently unknown rig repair needs and/or additional
opportunities to accelerate planned maintenance expenditures due to
presently unanticipated rig downtime;
|
|
•
|
higher than anticipated accruals for performance-based
compensation due to better than anticipated performance by us, higher than
anticipated severance expenses due to unanticipated employee terminations,
higher than anticipated legal and accounting fees due to unanticipated
financing or other corporate transactions, and other factors that could
increase general and administrative expenses;
|
9
|
•
|
the actions of our competitors in the offshore drilling
industry, which could significantly influence rig dayrates and
utilization;
|
|
•
|
changes in the geographic areas in which our customers plan
to operate, which in turn could change our expected effective tax
rate;
|
|
•
|
changes in oil and gas drilling technology or in our
competitors drilling rig fleets that could make our drilling rigs less
competitive or require major capital investments to keep them
competitive;
|
|
•
|
the effects and uncertainties of legal and administrative
proceedings and other contingencies;
|
|
•
|
the impact of governmental laws and regulations and the
uncertainties involved in their administration, particularly in some
foreign jurisdictions;
|
|
•
|
changes in accepted interpretations of accounting guidelines
and other accounting pronouncements and tax laws;
|
|
•
|
the risks involved in the construction, upgrade, and repair
of our drilling units; and
|
|
•
|
such other factors as may be discussed in this report and
our other reports filed with the Securities and Exchange Commission, or
SEC.
|
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. See also Risk Factors in Item 1A. Other unknown or
unpredictable factors could also have material adverse effects on future results. The words
believe, impact, intend, estimate, anticipate, plan and similar expressions identify
forward-looking statements. These forward-looking statements are found at various places
throughout the Managements Discussion and Analysis in our Annual Report to Shareholders for
fiscal year 2007 incorporated by reference in Part I, Part II, Part IV and elsewhere in
this report. When considering any forward-looking statement, you should also keep in mind
the risk factors described in other reports or filings we make with the SEC from time to
time. Undue reliance should not be placed on these forward-looking statements, which are
applicable only on the date hereof. Neither we nor our representatives have a general
obligation to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof or to reflect the occurrence of
unanticipated events.
COMPANY
INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the internet at
the SECs web site at http://www.sec.gov. Our website address is www.atwd.com. We make
available free of charge on or through our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or furnish it
to, the SEC. We have adopted a code of ethics applicable to our chief executive officer and
our senior financial officers which is also available on our website. We intend to satisfy
the disclosure requirement regarding any changes in or waivers from our code of ethics by
posting such information on our website or by filing a Form 8-K for such event. Unless
stated otherwise, information on our website is not incorporated by reference into this
report or made a part hereof for any purpose. You may also read and copy any document we
file at the SECs Public Reference Room at 100F Street NE, Washington, DC 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms and copy
charges.
An investment in our securities involves significant risks. You should
carefully consider the risk factors described below before deciding whether to invest in
our securities. The risks and uncertainties described below are not the only ones we face.
You should also carefully read and consider all of the information we have included, or
incorporated by reference, in
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this
report on Form 10-K before you decide to invest in our securities. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also
impair our business.
WE RELY
ON THE OIL AND NATURAL GAS INDUSTRY AND VOLATILE OIL AND NATURAL GAS PRICES IMPACT DEMAND
FOR OUR SERVICES.
Demand for our services depends on activity in offshore oil and natural gas
exploration, development and production. The level of exploration, development and
production activity is affected by factors such as:
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prevailing oil and natural gas prices;
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expectations about future prices;
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the cost of exploring for, producing and delivering oil and
natural gas;
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the sale and expiration dates of available offshore
leases;
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worldwide demand for petroleum products;
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current availability of oil and natural gas
resources;
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the rate of discovery of new oil and natural gas reserves in
offshore areas;
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local and international political and economic
conditions;
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technological advances;
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ability of oil and natural gas companies to generate or
otherwise obtain funds for capital;
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the ability of the Organization of Petroleum Exporting
Countries, or OPEC, to set and maintain production levels and
pricing;
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political or other disruptions that limit exploration,
development and production in oil-producing countries;
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the level of production by non-OPEC countries;
and
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laws and governmental regulations that restrict exploration
and development of oil and natural gas in various jurisdictions.
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During recent years, the level of offshore exploration, development and
production activity has been volatile. Such volatility is likely to continue in the future.
A decline in the worldwide demand for oil and natural gas or prolonged low oil or natural
gas prices in the future would likely result in reduced exploration and development of
offshore areas and a decline in the demand for our services. Even during periods of high
prices for oil and natural gas, companies exploring for oil and gas may cancel or curtail
programs, or reduce their levels of capital expenditures for exploration and production for
a variety of reasons. Any such decrease in activity is likely to reduce our day rates and
our utilization rates and, therefore, could have a material adverse effect on our financial
condition, results of operations and cash flows.
RIG
CONVERSIONS, UPGRADES OR NEWBUILDS MAY BE SUBJECT TO DELAYS AND COST OVERRUNS.
From time to time we may undertake to increase our fleet capacity through
conversions or upgrades to rigs or through new construction. These projects are subject to
risks of delay or cost overruns inherent in any large construction project resulting from
numerous factors, including the following:
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shortages of equipment, materials or skilled
labor;
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unscheduled delays in the delivery of ordered materials and
equipment;
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unanticipated cost increases;
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difficulties in obtaining necessary permits or in meeting
permit conditions;
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design and engineering problems; and
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OPERATING HAZARDS INCREASE OUR RISK OF LIABILITY; WE MAY NOT BE ABLE TO
FULLY INSURE AGAINST THESE RISKS.
Our operations are subject to various operating hazards and risks,
including:
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catastrophic marine disaster;
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adverse sea and weather conditions;
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oil and hazardous substance spills, containment and clean
up;
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labor shortages and strikes;
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damage to and loss of drilling rigs and production
facilities; and
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war, sabotage and terrorism.
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These risks present a threat to the safety of personnel and to our rigs,
cargo, equipment under tow and other property, as well as the environment. We could be
required to suspend our operations or request that others suspend their operations as a
result of these hazards. Third parties may have significant claims against us for damages
due to personal injury, death, property damage, pollution and loss of business if such
event were to occur in our operations.
We maintain insurance coverage against the casualty and liability risks
listed above. We believe our insurance is adequate, and we have never experienced a loss in
excess of policy limits. However, we may not be able to renew or maintain our existing
insurance coverage at commercially reasonable rates or at all. Additionally, there is no
assurance that our insurance coverage will be adequate to cover future claims that may
arise.
THE
INTENSE PRICE COMPETITION AND CYCLICALITY OF OUR INDUSTRY, WHICH IS MARKED BY PERIODS OF
LOW DEMAND, EXCESS RIG AVAILABILITY AND LOW DAYRATES, COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES, PROFITABILITY AND CASH FLOWS.
The contract drilling business is highly competitive with numerous industry
participants. The industry has experienced consolidation in recent years and may experience
additional consolidation. 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 job, although rig availability and the quality and technical
capability of service and equipment are also factors. We compete with approximately ten
other drilling contractors, most of which are substantially larger and have appreciably
greater resources than us.
The industry in which we operate historically has been cyclical, marked by
periods of low demand, excess rig supply and low dayrates, followed by periods of high
demand, short rig supply and increasing dayrates. Periods of excess rig supply intensify
the competition in the industry and often result in rigs being idled. Several markets in
which we operate are currently oversupplied. Lower utilization and dayrates in one or more
of the regions in which we operate would adversely affect our revenues and profitability.
Prolonged periods of low utilization and dayrates could also result in the recognition
of
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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. We may be required to idle rigs or to enter into lower-rate
contracts in response to market conditions in the future.
WE RELY
HEAVILY ON A SMALL NUMBER OF CUSTOMERS AND THE LOSS OF A SIGNIFICANT CUSTOMER COULD HAVE AN
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. Woodside Energy Ltd., BHP Billiton
Petroleum Pty and Sarawak Shell Bhd. provided approximately 17%, 13%, and 13%, respectively
of our consolidated revenues in fiscal year 2007. Our results of operations could be
materially adversely affected if any of our major customers terminate its contracts with
us, fails to renew our existing contracts or refuses to award new contracts to
us.
WE MAY
SUFFER LOSSES IF OUR CUSTOMERS TERMINATE OR SEEK TO RENEGOTIATE THEIR CONTRACTS.
Certain of our contracts with customers may be cancelable upon specified
notice at the option of the customer. Other contracts require the customer to pay a
specified early termination payment upon cancellation, which payments may not fully
compensate us for the loss of the contract. Contracts customarily provide for either
automatic termination or termination at the option of the customer in the event of total
loss of the drilling rig or if drilling operations are suspended for extended periods of
time by reason of acts of God or excessive rig downtime for repairs, or other specified
conditions. Early termination of a contract may result in a rig being idle for an extended
period of time. Our revenues may be adversely affected by customers' early termination of
contracts, especially if we are unable to recontract the affected rig within a short period
of time. 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. The renegotiation of a number
of our drilling contracts could adversely affect our financial position, results of
operations and cash flows.
WE ARE
SUBJECT TO OPERATING RISKS SUCH AS BLOWOUTS AND WELL FIRES THAT COULD RESULT IN
ENVIRONMENTAL DAMAGE, PROPERTY LOSS, AND PERSONAL INJURY OR DEATH.
Our drilling operations are subject to many hazards that could increase the
likelihood of accidents. Accidents can result in:
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costly delays or cancellations of drilling
operations;
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serious damage to, or destruction of, equipment;
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personal injury or death;
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significant impairment of producing wells or underground
geological formations; and
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major environmental damage.
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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 drilling rigs and
offshore drilling platforms whose three legs independently penetrate the ocean floor,
flooding semisubmersible ballast tanks to help fix the floating drilling unit over the well
site and drilling into high-pressure formations are complex, hazardous activities and we
can encounter problems.
We have had accidents in the past due to some of the hazards described
above, including the fiscal year 2004 ATWOOD BEACON incident. Because of the ongoing
hazards associated with our operations:
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we may experience a higher number of accidents in the future
than expected;
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our insurance coverage may prove inadequate to cover losses
that are greater than anticipated;
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our insurance deductibles may increase; or
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our insurance premiums may increase to the point where
maintaining our current level of coverage is prohibitively
expensive.
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Any similar events could yield future operating losses and have a
significant adverse impact on our business.
OUR
RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE CONTRACTS FOR
OUR DRILLING 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.
If demand for our rigs declines, rig utilization and dayrates are generally adversely
affected.
FAILURE
TO OBTAIN AND RETAIN KEY PERSONNEL COULD IMPEDE OUR OPERATIONS.
We depend to a significant extent upon the efforts and abilities of our
executive officers and other key management personnel. There is no assurance that these
individuals will continue in such capacity for any particular period of time. The loss of
the services of one or more of our executive officers or key management personnel could
adversely affect our operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL RISKS REDUCE OUR BUSINESS
OPPORTUNITIES AND INCREASE OUR COSTS.
We must comply with extensive government regulation in the form of
international conventions, federal, state and local laws and regulations in jurisdictions
where our vessels operate and are registered. These conventions, laws and regulations
govern oil spills and matters of environmental protection, worker health and safety, and
the manning, construction and operation of vessels, and vessel and port security. We
believe that we are in material compliance with all applicable environmental, health and
safety, and vessel and port security laws and regulations. We are not a party to any
pending governmental litigation or similar proceeding, and we are not aware of any
threatened governmental litigation or proceeding which, if adversely determined, would have
a material adverse effect on our financial condition or results of operations. However, the
risks of incurring substantial compliance costs, liabilities and penalties for
non-compliance are inherent in our industry. Compliance with environmental, health and
safety, and vessel and port security laws increases our costs of doing business.
Additionally, environmental, health and safety, and vessel and port security laws change
frequently. Therefore, we are unable to predict the future costs or other future impact of
environmental, health and safety, and vessel and port security laws on our operations.
There is no assurance that we can avoid significant costs, liabilities and penalties
imposed as a result of governmental regulation in the future.
OUR
RELIANCE ON FOREIGN OPERATIONS EXPOSES US TO ADDITIONAL RISKS NOT GENERALLY ASSOCIATED WITH
DOMESTIC OPERATIONS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS OR FINANCIAL
RESULTS.
During the past five years, we derived substantially all of our revenues
from foreign sources. We, therefore, face risks inherent in conducting business
internationally, such as:
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legal and governmental regulatory requirements;
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difficulties and costs of staffing and managing
international operations;
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language and cultural differences;
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potential vessel seizure or nationalization of
assets;
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import-export quotas or other trade barriers;
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renegotiation or nullification of existing
contracts;
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difficulties in collecting accounts receivable and longer
collection periods;
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foreign and domestic monetary policies;
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political and economic instability;
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terrorist acts, war and civil disturbances;
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assault on property or personnel;
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travel limitations or operational problems caused by severe
acute respiratory syndrome (SARS) or other public health
threats;
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imposition of currency exchange controls; and
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potentially adverse tax consequences, including those due to
changes in laws or interpretation of existing laws.
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In the past, these conditions or events have not materially affected our
operations. However, we cannot predict whether any such conditions or events might develop
in the future. Also, we organized our subsidiary structure and our operations, in part,
based on certain assumptions about various foreign and domestic tax laws, currency exchange
requirements, and capital repatriation laws. While we believe our assumptions are correct,
there can be no assurance that taxing or other authorities will reach the same conclusion.
If our assumptions are incorrect, or if the relevant countries change or modify such laws
or the current interpretation of such laws, we may suffer adverse tax and financial
consequences, including the reduction of cash flow available to meet required debt service
and other obligations. Any of these factors could materially adversely affect our
international operations and, consequently, our business, operating results and financial
condition.
WE MAY
SUFFER LOSSES AS A RESULT OF FOREIGN EXCHANGE RESTRICTIONS AND FOREIGN CURRENCY
FLUCTUATIONS.
A significant portion of the contract revenues of our foreign operations are
paid in United States dollars; however, some payments are made in foreign currencies. As a
result, we are exposed to currency fluctuations and exchange rate risks as a result of our
foreign operations. To minimize the financial impact of these risks when we are paid in
foreign currency, we attempt to match the currency of operating costs with the currency of
contract revenue. However, any increase in the value of the United States dollar in
relation to the value of applicable foreign currencies could adversely affect our operating
revenues when translated into United States dollars. To date, currency fluctuations have
not had a material impact on our financial condition or results of operations.
WE ARE
SUBJECT TO WAR, SABOTAGE AND TERRORISM, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS.
The terrorist attacks of September 11, 2001 have had a continuing impact,
including those related to the current United States military campaigns in Afghanistan and
Iraq, on the energy industry. It is unclear what impact the current United States military
campaigns or possible future campaigns will have on the energy industry in general, or us
in particular, in the future. Uncertainty surrounding retaliatory military strikes or a
sustained military campaign may affect our operations in unpredictable ways, including
changes in the insurance markets, disruptions of fuel supplies and markets, particularly
oil, and the possibility that infrastructure facilities, including pipelines, production
facilities, refineries, electric generation, transmission and distribution facilities,
could be direct targets of, or indirect casualties of, an act of terror. War or risk of war
may also have an adverse effect on the economy.
The terrorist attacks have resulted in a hardening of the insurance market.
We maintain insurance coverage against casualty and liability risks and have renewed our
primary insurance program for the insurance year 2006-2007. We will evaluate the need to
maintain this coverage as it applies to our drilling fleet in the future. We believe our
insurance is adequate, and we have never experienced a loss in excess of policy limits.
There is no assurance that our insurance coverage will be available or affordable and, if
available, whether it will be adequate to cover future claims that may arise.
Instability in the financial markets as a result of war, sabotage or
terrorism could also affect our ability to raise capital and could also adversely affect
the oil, gas and power industries and restrict their future growth.
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THE
SUBSTANTIAL EQUITY INTEREST OWNED BY CERTAIN SHAREHOLDERS MAY LIMIT THE ABILITY OF OTHER
SHAREHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING
SHAREHOLDER APPROVAL.
As of November 28, 2007, Helmerich & Payne International Drilling Co.,
owns of record and beneficially 4,000,000 shares, or approximately 13% of the issued and
outstanding shares of our common stock. One of our directors, Hans Helmerich is an
executive officer of Helmerich & Payne, Inc. (H&P) the parent company of Helmerich
& Payne International Drilling Co. Another director, George Dotson, was also an
executive officer of H&P up until his retirement in 2006. The beneficial ownership of
our common stock and membership of an officer of H&P on our board enables H&P to
exercise some influence over the election of directors and other corporate matters
requiring shareholder or board of directors' approval.
FUTURE
SALES OF OUR COMMON STOCK BY HELMERICH & PAYNE INTERNATIONAL DRILLING CO. OR ANY OTHER
LARGE SHAREHOLDER COULD ADVERSELY AFFECT OUR MARKET PRICE.
Helmerich & Payne International Drilling Co. has advised us that,
consistent with its pursuit of a strategy of focusing on its core drilling business, it
intends to evaluate its entire investment portfolio, which includes shares of our common
stock, and its cash requirements on a continuous basis and that it may seek to dispose of
all or a portion of the shares of our common stock owned by it when and as necessary, from
time to time, to fund its corporate needs. Until the sale of all of the shares of common
stock owned by Helmerich & Payne International Drilling Co. or any other large
shareholder are sold, we will or may have a large number of shares of common stock
outstanding and available for resale beginning at various points in the future. Sales of a
substantial number of shares of our common stock in the public market, or the possibility
that these sales may occur, could also make it more difficult for us to sell our common
stock or other equity securities in the future at a time and at a price that we deem
appropriate.
ANTI-TAKEOVER PROVISIONS IN OUR AMENDED AND RESTATED CERTIFICATE OF
FORMATION, SECOND AMENDED AND RESTATED BYLAWS, AND 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 often receive a premium
for their shares upon a change of control. Texas law and the following provisions, among
others, of our certificate of formation, 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:
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We are subject to a provision of Texas corporate law that
prohibits us from engaging in a business combination with any shareholder
for three years from the date that person became an affiliated shareholder
by beneficially owning 20% or more of our outstanding common stock, unless
specified conditions are met.
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Special meetings of shareholders may not be called by anyone
other than our chairman of the board of directors, president, or the
holders of at least one-tenth of all shares issued, outstanding, and
entitled to vote.
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Our board of directors has the authority to issue up to
1,000,000 shares of "blank-check" preferred stock and to determine the
voting rights and other privileges of these shares without any vote or
action by our shareholders.
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We have issued "poison pill" rights to purchase Series A
Junior Participating Preferred Stock under our rights plan, whereby the
ownership of our shares by a potential acquirer can be significantly
diluted by the sale at a significant discount of additional shares of our
common stock to all other shareholders, which could discourage unsolicited
acquisition proposals.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
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