NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED
INTERIM INFORMATION
The unaudited interim
condensed consolidated financial statements as of December 31, 2007 and for the three month
periods ended December 31, 2007 and 2006, included herein, have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim
financial information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. The year end condensed consolidated balance sheet data was derived from the audited
financial statements as of September 30, 2007. Although these financial statements and
related information have been prepared without audit, and certain information and note
disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, we believe that the note
disclosures are adequate to make the information not misleading. The interim financial
results may not be indicative of results that could be expected for a full year. It is
suggested that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in our Annual
Report to Shareholders for the year ended September 30, 2007.
In our opinion, the unaudited
interim financial statements reflect all adjustments considered necessary for a fair
statement of our financial position and results of operations for the periods
presented.
2.
SHARE-BASED
COMPENSATION
We recognize compensation
expense on grants of share-based compensation awards on a straight-line basis over
the
required service
period for each award. As of
December 31, 2007,
unrecognized compensation
cost, net of estimated forfeitures,
re
lated to stock options and
restricted stock awards was approximately $6.5 million
and $14.4 million,
respectively,
which we expect to recognize
over a weighted average period of approximately 3.1 years.
The recognition of
share-based compensation expense had the following effect on our consolidated statements of
operations (in thousands, except per share amounts):
|
|
Three Months Ended
December 31, 2007
|
|
Three Months Ended December 31,
2006
|
|
|
|
|
|
|
|
Increase in
contract drilling expenses
|
$
|
356
|
|
$
|
260
|
|
Increase in
general and administrative expenses
|
|
1,064
|
|
|
953
|
|
Decrease in
income tax provision
|
|
(372
|
)
|
|
(334
|
)
|
Decrease of net
income
|
$
|
1,048
|
|
$
|
879
|
|
Decrease in
earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.03
|
|
$
|
0.03
|
|
Awards of
restricted stock and stock options have both been granted under our stock incentive plans
during the current fiscal year.
We deliver
newly issued shares of common stock for restricted stock awards upon vesting and upon
exercise of stock options.
All stock
incentive plans currently in effect have been approved by the shareholders of our
outstanding common stock.
Stock
Options
Under
our
stock
incentive
plans, the
exercise price of each
stock
option equals
the
fair
market
value
of one share
of our common stock on the date of grant, with all outstanding options having a maximum
term of 10 years. Options vest
ratably
over a period
from the end of the first to the fourth year from the date of grant. Each option is for the
purchase of one share of our common stock.
The per share weighted
average fair value of stock options granted during the
three
months ended
December, 2007 was $40.68. We
estimated the fair value of each stock option
then outstanding
using the Black-Scholes
pricing model and the following assumptions
for the nine months ended
December 31, 2007:
Risk-Free Interest Rate
|
3.7%
|
Expected
Volatility
|
46%
|
Expected Life
(Years)
|
5.27
|
Dividend Yield
|
None
|
The average risk-free
interest rate is based on the
five
-year U.S. treasury security
rate in effect as of the grant date. We determined expected volatility using a
6
-year historical volatility
figure and
determined
the expected term of the stock options using
10 years of historical data.
We have never paid any cash dividends on our common stock.
A summary of stock
option activity during the
three months ended December 31, 2007
is
as follows:
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
|
|
Wtd.
Avg.
|
|
Remaining
|
|
Aggregate
|
|
|
|
Number
of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Options (000s)
|
|
Price
|
|
Life (Years)
|
|
Value (000s)
|
|
Outstanding at October 1, 2007
|
|
881
|
|
$ 24.54
|
|
6.5
|
|
$ 45,854
|
|
Granted
|
|
94
|
|
$ 89.50
|
|
|
|
|
|
Exercised
|
|
(27)
|
|
$ 19.81
|
|
|
|
$ 1,917
|
|
Forfeited
|
|
(2)
|
|
$ 59.18
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
946
|
|
$ 31.03
|
|
6.6
|
|
$ 65,452
|
|
Exercisable
at December 31, 2007
|
|
646
|
|
$ 20.93
|
|
5.7
|
|
$ 51,251
|
|
Restricted
Stock
We
have
also
awarded
restricted stock to certain
employees and to our non-employee directors. The awards of restricted stock have various
vesting periods ranging from thirteen months to four years. All restricted stock awards
granted to date are restricted from transfer for three or four years from the date of
grant, whether vested or unvested.
We value restricted stock
awards
at fair
market value of our common
stock on the date of grant.
A summary of restricted stock
activity for the three months ended December 31, 2007,
is as follows:
|
|
|
Number of Shares
(000s)
|
|
|
Wtd.Avg. Fair
Value
|
|
Unvested at
September 30, 2007
|
|
|
160
|
|
$
|
43
.39
|
|
Granted
|
|
|
137
|
|
$
|
89
.50
|
|
Vested
|
|
|
--
|
|
|
|
|
|
Forfeited
|
|
|
(2
|
)
|
$
|
72.71
|
|
Unvested at
December 31, 2007
|
|
|
295
|
|
$
|
64
.
57
|
|
3. EARNINGS
(LOSS) PER COMMON SHARE
The
computation of basic and diluted earnings per share is as follows (in thousands, except per
share amounts):
|
|
|
|
Three Months Ended
|
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share Amount
|
|
December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$
|
38,549
|
|
|
31,685
|
|
$
|
1.22
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
--
|
|
|
477
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
$
|
38,549
|
|
|
32,162
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$
|
21,085
|
|
|
31,060
|
|
$
|
0
.68
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
--
|
|
|
554
|
|
$
|
0
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
$
|
21,085
|
|
|
31,614
|
|
$
|
0
.67
|
The calculation of diluted
earnings per share for the three
month
period
ended December 31,
2007
excludes
consideration of
shares of
common
stock
relate
d to 228,000 outstanding
stock options
because
such options were anti-dilutive. These options could potentially dilute basic
earnings per share
in the future.
4. PROPERTY
AND EQUIPMENT
A summary of property and
equipment by classification is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
September 30,
2007
|
|
|
|
|
Drilling vessels and
related equipment
|
|
|
|
|
|
|
|
|
Cost
|
|
|
$
|
806,840
|
|
$
|
778,469
|
|
Accumulated
depreciation
|
|
|
|
(300,241
|
)
|
|
(292,790
|
)
|
Net
book value
|
|
|
|
506,599
|
|
|
485,679
|
|
|
|
|
Drill
Pipe
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
15,612
|
|
|
15,587
|
|
Accumulated
depreciation
|
|
|
|
(10,544
|
)
|
|
(9,970
|
)
|
Net
book value
|
|
|
|
5,068
|
|
|
5,617
|
|
|
|
|
Furniture and
other
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
9,328
|
|
|
9,211
|
|
Accumulated
depreciation
|
|
|
|
(6,825
|
)
|
|
(6,656
|
)
|
Net
book value
|
|
|
|
2,503
|
|
|
2,555
|
|
|
|
|
NET PROPERTY AND
EQUIPMENT
|
|
|
$
|
514,170
|
|
$
|
493,851
|
|
5. LONG-TERM DEBT
During October
2007, we
entered into a new credit agreement with several banks with Nordea Bank Finland PLC, New
York Branch, as Administrative Agent for the lenders, as well as Lead Arranger and Book
Runner. The new credit agreement provides for a secured 5-year $300,000,000 non-amortizing
revolving loan facility with maturity in October 2012, subject to acceleration upon certain
specified events of defaults, including breaches of representations or covenants. Loans
under the new facility will bear interest at varying rates ranging from 0.70% to 1.25% over
Eurodollar Rate
,
depending upon the ratio of outstanding debt to earnings
before interest, taxes and depreciation. The new credit agreement supports the issuance,
when required, of standby letters of credit. The standby letters of credit previously
outstanding under our prior credit facility were incorporated into our new credit facility
and are deemed issued thereunder.
The collateral for the new credit agreement consists
primarily of preferred mortgages on three of our active drilling units (ATWOOD EAGLE,
ATWOOD HUNTER and ATWOOD BEACON). The new credit agreement contains various financial
covenants that, among other things, require the maintenance of certain leverage and
interest expense coverage ratios. Under the new credit agreement, we are required to pay a
fee ranging from 0.225% to 0.375% per annum on the unused portion of the credit facility
and certain other administrative costs. The credit facility will provide funding for future
growth opportunities and for general corporate needs.
In conjunction with the establishment of the new credit
agreement, we terminated our prior senior secured credit facility and repaid the remaining
$18 million outstanding
as of September 30, 2007
during
October 2007.
We also wrote
off
to interest expense
the
remaining unamortized loan costs of approximately $0.4 million related to the prior credit
facility
during the quarter ended December 31,
2007.
6. INCOME TAXES
We adopted the provision of FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes” or FIN48, on October 1, 2007. As a
result of the implementation of FIN48, we recognized
an approximate $1.5
million increase in the long-term liability for uncertain tax
positions
which was accounted for as a reduction to
the October 1, 2007 balance of retained earnings. After the adoption of FIN48, we had
$3.7
million of reserves for uncertain tax positions,
including estimated accrued interest and penalties of $1.7 million
as of October 1, 2007
which are included as Other Long Term Liabilities in the
Consolidated Balance Sheet.
We record estimated
accrued
interest and
penalties related to uncertain tax positions in income tax
expense. During the three months ended December 31,
2007,
there has not been a material change in our
uncertain tax positions.
At December 31, 2007,
we had $3.8
million of
reserves for uncertain tax positions, including estimated accrued interest and penalties of
$1.7 million
which are included as Other Long Term
Liabilities in the Consolidated Balance Sheet.
At December 31, 2007, all $3.8 million of the net
unrecognized tax benefits would affect the effective tax rate if recognized.
Our United States tax returns for fiscal year 2005 and
subsequent years remain subject to examination by tax authorities. As we conduct business
globally, we have various tax years remaining open to examination in our international tax
jurisdictions. We do not anticipate that any tax contingencies resolved during the next 12
months will have a material impact on our consolidated financial position, results of
operations or cash flows.
Virtually all of our tax provision for each of the three
months ended December 31, 2007 and 2006 relates to taxes in foreign jurisdictions.
Accordingly, due to the high level of operating income earned
in certain nontaxable and deemed profit tax jurisdictions during the
three months ended December 31, 2007 and 2006,
our effective tax rate for these periods was significantly
less than the United States
federal
statutory rate.
7.
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities”, which
provides companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements to facilitate
comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. GAAP has required different measurement attributes for
different assets and liabilities that can create artificial volatility in earnings. The
objective of SFAS No. 159 is to help mitigate this type of volatility in the earnings by
enabling companies to report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with complex hedge accounting provisions.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are
currently analyzing the provisions of SFAS No. 159
and
determining how it will affect accounting policies and procedures, but we have not yet made
a determination of the impact the adoption will have on our consolidated financial
position, results of operations and cash flows.
In September 2005, the FASB issued SFAS No. 157, “Fair
Value Measurements”, which defines fair value, establishes methods used to measure
fair value and expands disclosure requirements about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within
those fiscal periods. We are currently analyzing the provisions of SFAS No. 157 and
determining how it will affect accounting policies and procedures, but we have not yet made
a determination of the impact the adoption will have on our consolidated financial
position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations (revised 2007)”. This statement retains the fundamental
requirements for SFAS No. 141, “Business Combinations” that the acquisition
method be used for all business combinations and expands the same method of accounting to
all transactions and other events in which one entity obtains control over one of more
other businesses or assets at the acquisition date and in subsequent periods. This
statement replaces SFAS No. 141 by requiring measurement at the acquisition date of the
fair value of assets acquired, liabilities assumed and noncontrolling interest.
Additionally, SFAS No. 141(R) requires that acquisition-related costs, including
restructuring costs, be recognized separately from the acquisition. SFAS No. 141(R) applies
prospectively to business combinations for fiscal years beginning after December 31, 2008.
The impact of SFAS No. 141(R) will depend on the nature and extent of any future
acquisitions.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements – an amendment
of ARB No. 51”. SFAS No. 160 establishes the accounting and reporting standards for a
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This
statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS No. 160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests and applies prospectively to business
combinations for fiscal years beginning after December 15, 2008. We are currently analyzing
the provisions of SFAS No. 160
and determining how it
will affect accounting policies and procedures, but we have not yet made a determination of
the impact the adoption will have on our consolidated financial position, results of
operations and cash flows.
8.
COMMITMENTS AND
CONTINGENCIES
We are party to a number of lawsuits which are ordinary,
routine litigation incidental to our business, the outcome of which, individually, or in
the aggregate, is not expected to have a material adverse effect on our financial position,
results of operations, or cash flows.
9. SUBSEQUENT
EVENT
During January 2008, we executed a construction contract with
Jurong Shipyard Pte. Ltd. ("Jurong") to construct a Friede & Goldman ExD Millennium
Semisubmersible Drilling Unit. The new rig will be constructed at Jurong's shipyard in
Singapore, with delivery expected to occur in early 2011. We estimate the total cost of the
rig will be $570 million to $590 million. The new rig will be able to conventionally moor
in up to 6,000 feet of water with its own mooring equipment and with pre-laid mooring
equipment could work in up to 8,000 feet of
water.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION
AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q for the
quarterly period ended December 31, 2007
includes
s
tatements
about
Atwood Oceanics, Inc. (which
together with its subsidiaries is identified as the “Company,” “we”
or “our,” unless the context indicates
otherwise)
which are not historical
facts
(including any
statements concerning plans and objectives of management for
future operations or economic
performance, or assumptions related thereto)
which
are
forward-looking statements.
In addition, we and our representatives may,
from time to time,
make other oral or written
statements which are also
forward-looking
statements.
These forward-looking
statements are made based upon management's 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.
Important factors that could
cause our actual results of operations,
financial conditions
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
e
lsewhere;
- 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;
- 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;
- rig availability;
- 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. 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 Management’s Discussion and Analysis in Part I, Item 2 hereof 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, including our Form 10K for the year ended September 30, 2007.
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.
.
MARKET
OUTLOOK
Currently,
we have approximately 98% of available rig days for the remainder of fiscal year 2008
contracted, with contracted rig days for fiscal years
2009 and 2010 at
approximately 32% and 11%, respectively. A comparison of the average per day revenue for
fiscal years 2006, 2007 and for the first three months of fiscal year 2008 for each of our
eight drilling units to their current highest dayrate commitment is as follows:
|
Average
Per Day Revenues
(1)
|
|
|
|
Fiscal
Year
2006
|
Fiscal Year
2007
|
First Three
Months of Fiscal Year 2008
|
Current Highest
Dayrate Commitment
(1)
|
|
Percentage
Change
From
First
Three Months of
Fiscal Year 2008 to
Current Highest Dayrate Commitment
|
|
|
|
|
|
|
|
ATWOOD
EAGLE
|
$129,000
|
$160,000
|
$134,000
|
$450,000
|
|
236%
|
ATWOOD
HUNTER
|
172,000
|
2
34,000
|
312,000
|
240,000
|
|
(23%)
|
ATWOOD
FALCON
|
83,000
|
138,000
|
187,000
(2)
|
187,000
|
(2)
|
0%
|
ATWOOD
SOUTHERN
CROSS
|
82,000
|
171,000
|
221,000
|
406,000
|
|
84%
|
ATWOOD
BEACON
|
88,000
|
109,000
|
114,000
|
133,500
|
|
17%
|
VICKSBURG
|
82,000
|
110,000
|
152,000
|
154,000
|
|
1%
|
SEAHAWK
|
32,000
|
84,000
|
78,000
|
93,000
|
(3)
|
19%
|
RICHMOND
|
55,000
|
81,000
|
------
(4)
|
80,000
|
|
-----
(4)
|
_____________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
1)
Average per day revenues include
dayrate and service revenues and amortized deferred fees. The
current
highest
dayrate commitment includes estimated amortized
deferred fees where noted.
|
(2) At a
certain water depth, the dayrate would increase to $200,000; however we
currently expect most, if not all, work will be at the $160,000 dayrate level
which, with estimated amortized deferred fees of $27,000 per day results in the
commitment amount of $187,000 per day.
|
(3)
Includes estimated amortized deferred fees of $17,000 per day.
|
(4) The rig
was in a shipyard virtually the entire quarter undergoing a life enhancing
upgrade. Following the completion of this
upgrade (estimated February 2008),
the rig
has contract commitments of thirty (30) days at a dayrate of $80,000 and four
(4) to
six (6) months at a dayrate of
$65,000.
|
The
ATWOOD EAGLE is working offshore Australia for BHP Billiton Petroleum (“BHPB”)
at a dayrate
of
approximately $170,000. The
BHPB drilling program is
currently expected to extend into May 2008. Immediately following the completion of the
BHPB work, the rig has a one-well commitment at a dayrate of $360,000 followed by a
two-year commitment with Woodside Energy Limited (“Woodside”) at a dayrate of
$405,000. Following completion of the Woodside drilling program (estimated July 2010),
Chevron Australia Pty. Ltd. (“Chevron”) has committed to use the rig at a
dayrate of approximately $430,000 to
$450,000 (subject to
adjustment for cost escalation) until our new semisubmersible drilling unit being build in
Singapore is ready to commence its drilling program commitment in Australia (estimated
early 2011) with Chevron. The ATWOOD HUNTER is currently being mobilized to
Mauritania
to commence
work
under the
suspended Woodside contract which has been assigned to Petronas Carigali Sdn. Bhd. This
contract has an operating dayrate of $240,000 and will extend to August 2008. The ATWOOD
FALCON has a contractual commitment, which extends to July 2009, offshore Malaysia at a
current dayrate of $160,000 plus estimated amortized deferred fees of $27,000 per day (over
a certain water depth the dayrate will be $200,000; however, we believe that most, if not
all, wells drilled will be at the $160,000 dayrate level). The ATWOOD SOUTHERN CROSS has
recently left the Black Sea and is back in the Mediterranean Sea where it will drill one
(1) well for Turkiye Petrolleri A.O. at a dayrate of $320,000 and then drill two (2) to
four (4) wells for ENI Spa AGIP Exploration & Production Division
(“ENI”)
at a dayrate of $406,000. If
all wells are drilled, the rig’s current contract commitments could extend into
November 2008.
Currently, our two active jack-up drilling units, the ATWOOD BEACON and VICKSBURG, have
contract commitments to January 2009 and June 2009, respectively. The ATWOOD BEACON is
currently working at a dayrate of $133,500, while the VICKSBURG is working at a dayrate of
$154,000. The SEAHAWK is working offshore West Africa under a drilling contract that
extends to September 2008; however, this contract provides for four (4) six-month options
at the current dayrate plus certain cost escalations. The rig’s current dayrate is
approximately $76,000, which with amortized deferred fees of $17,000 per day results in the
total daily revenue of $93,000. Our only rig in the U.S. Gulf of Mexico, the RICHMOND, is
currently in a shipyard undergoing an approximate $17 million life enhancing upgrade, which
is expected to be completed in February 2008. Following the shipyard work, the RICHMOND has
a one (1) well commitment at a dayrate of $80,000 for the first approximately thirty (30)
days then declining to $65,000 for all days thereafter required to complete the well. The
rig also has a contract commitment with Contango Operations Inc. to drill two (2) firm
wells plus an option for one (1) additional well all at a dayrate of $65,000, which, if all
three (3) wells are drilled, could extend into September 2008.
We are in the process of expanding our drilling fleet with the construction of two (2)
additional drilling units. Our ultra premium jack-up, ATWOOD AURORA, is being constructed
in Brownsville, Texas, with an expected delivery date in November 2008 at a total cost
(including capitalized interest) of approximately $164 million. We are currently pursuing a
contract opportunity for the rig outside of the United States. In December 2007, we were
awarded a contract by Chevron Australia Pty. Ltd. to provide a newly constructed Mobile
Offshore Semisubmersible Drilling Unit for a firm three (3) year period, with an option to
extend the firm period to six (6) years. The contract provides for an operating dayrate of
approximately $470,000, if the firm commitment is three (3) years, and approximately
$450,000, if the option is exercised to extend the firm commitment period to six (6) years.
Both dayrates are subject to adjustment pursuant to cost escalation provisions of the
contract. To provide the drilling rig required by the contract, we have executed a
construction contract with Jurong Shipyard Pte. Ltd. (“Jurong”) to construct a
Friede & Goldman ExD Millennium Semisubmersible Drilling Unit. This new rig will be
constructed at Jurong’s shipyard in Singapore, with delivery expected to occur in
early 2011. We estimate the total cost of the rig (including capitalized interest) will be
$570 million to $590 million. Financing for the rig construction will be provided by a
combination of our ongoing cash flows and debt, as necessary, from our new $300 million
credit facility. We have an option for a second rig with Jurong which requires exercise by
the Company prior to June 30, 2008. We have made no determination at this time as to
whether the option will be exercised.
The continuing strong market environment is not only supporting high equipment utilization
with historically high dayrates, but also continues to reflect increasing operating costs.
Total drilling costs for the first quarter of fiscal year 2008 compared to the first and
fourth quarters of fiscal year 2007 increased 4% and 9%, respectively. We currently expect
a 10% to 12% fleetwide increase in total drilling costs for fiscal year 2008 compared to
fiscal year 2007.
Besides the
planned
zero rate days currently
being incurred by the RICHMOND while undergoing its life enhancing upgrade,
the ATWOOD HUNTER incurred
twenty (20) zero rate days in January while undergoing some equipment upgrades.
The ATWOOD SOUTHERN CROSS
incurred one (1) zero rate day following its mobilization from the Black Sea and could
incur four (4) to ten (10) zero rate days prior to commencing the ENI drilling program. The
ATWOOD BEACON is expected to incur three (3) zero rate days during the third quarter of
fiscal year 2008 for some required inspections.
The SEAHAWK is also expected
to incur three (3) to five (5) zero rate days during the third quarter of fiscal year 2008
for some equipment upgrades.
Other than completing the
RICHMOND’s upgrade, we currently have no
additional
planned shipyard periods for
any of our rigs for the remainder of fiscal year 2008; however, we can give no assurance
that we will not incur
unplanned zero rate days on
any
of our rigs during
the remainder of fiscal year 2008. During the first quarter of fiscal year 2008,
we incurred twenty-four (24)
unplanned zero rate days, and thus far in the second quarter of fiscal year 2008, the
ATWOOD EAGLE has incurred five (5) unplanned zero rate days, with the ATWOOD FALCON
incurring one (1) unplanned zero rate day.
In recent fiscal years, we
have incurred approximately 1% to 2% of unplanned zero rate days per
fiscal
year
, or approximately 30 to 60
days.
Despite increasing drilling
costs and the continuing risk of unplanned zero rate time, we expect operating results for
fiscal year 2008 will reflect significant improvement over fiscal year 2007 results.
Assuming no additional new growth, we expect to end fiscal year 2008 with a debt to
capitalization ratio of less than 10%. With our strong balance sheet and continuing trend
for improvement in cash flows and financial results at historic levels, we will continue to
explore additional value enhancing growth opportunities, as well as evaluate the best use
of future cash flows.
RESULTS OF
OPERATIONS
Revenues for the three months
ended December 31, 2007 increased 25% compared to the three months ended December 31, 2006.
A comparative analysis of revenues is as follows:
|
REVENUES
|
|
|
|
(In
Millions)
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
Varia
nce
|
|
|
|
|
ATWOOD
HUNTER
|
|
|
$
|
28
.7
|
$
|
17
.8
|
$
|
10
.9
|
ATWOOD SOUTHERN
CROSS
|
|
|
|
20
.3
|
|
11
.4
|
|
8
.9
|
ATWOOD
FALCON
|
|
|
|
17
.2
|
|
8
.9
|
|
8
.3
|
VICKSBURG
|
|
|
|
14
.0
|
|
8
.5
|
|
5
.5
|
ATWOOD
BEACON
|
|
|
|
10
.5
|
|
8
.7
|
|
1
.8
|
SEAHAWK
|
|
|
|
7
.2
|
|
8
.1
|
|
(0
.9)
|
ATWOOD
EAGLE
|
|
|
|
12
.3
|
|
14
.8
|
|
(2
.5)
|
AUSTRALIA
MANAGEMENT CONTRACTS
|
|
|
|
--
|
|
3
.1
|
|
(3
.1)
|
RICHMOND
|
|
|
|
0
.8
|
|
7
.5
|
|
(6
.7)
|
|
|
|
$
|
111
.0
|
$
|
88
.8
|
$
|
22
.2
|
The increase in
fleetwide
revenues for the
current
quarter
is primarily attributable to
the increase in average dayrates due to improving market conditions and strong demand for
offshore drilling equipment as previously discussed in “Market Outlook”.
Increases in revenues for the ATWOOD HUNTER, ATWOOD
SOUTHERN CROSS,
ATWOOD FALCON,
VICKSBURG
and
ATWOOD BEACON were related to
each of these drilling units working under higher dayrate contracts during the current
quarter
and fiscal
year-to-date period
compared to the
same periods in
the prior fiscal year.
The decrease in revenues for
the SEAHAWK was due to sixteen (16) unplanned zero rate days incurred during the first
quarter of fiscal year 2008 for equipment related issues while the decrease in revenue for
the ATWOOD EAGLE was primarily due to fourteen (14) zero rate days incurred for planned
regulatory inspections. For most of the first quarter of fiscal year 2008, the RICHMOND was
in a shipyard undergoing a life-enhancing upgrade and earned no revenue during this time.
The
AUSTRALIA
MANAGEMENT CONTRACTS
were
terminated during the first
quarter of fiscal year 2007.
Contra
ct drilling costs for the
three months ended December 31, 2007 increased 4%
compared to the three months
ended December 31, 2006. An analysis of contract drilling costs by rig is as
follows:
|
CONTRACT DRILLING
COSTS
|
|
(In
millions)
|
|
Three Months Ended December
31,
|
|
2007
|
|
2006
|
|
Variance
|
|
|
|
|
|
|
ATWOOD SOUTHERN
CROSS
|
$ 7.6
|
|
$ 5.3
|
|
$ 2.3
|
ATWOOD EAGLE
|
9.9
|
|
7.9
|
|
2.0
|
SEAHAWK
|
8.7
|
|
6.8
|
|
1.9
|
ATWOOD HUNTER
|
7.6
|
|
5.9
|
|
1.7
|
VICKSBURG
|
4.4
|
|
3.8
|
|
0.6
|
ATWOOD BEACON
|
4.4
|
|
4.0
|
|
0.4
|
RICHMOND
|
1.7
|
|
3.1
|
|
(1.4)
|
AUSTRALIA MANAGEMENT
CONTRACTS
|
-
|
|
2.5
|
|
(2.5)
|
ATWOOD FALCON
|
5.5
|
|
8.7
|
|
(3.2)
|
OTHER
|
1.3
|
|
1.1
|
|
0.2
|
|
$ 51.1
|
|
$ 49.1
|
|
$ 2.0
|
|
|
|
|
|
|
On a fleetwide basis, wage
increases and extra personnel for training and development have resulted in higher
personnel costs
and
increases in the number of maintenance projects have resulted in higher equipment related
costs
during
the
three
months ended
December 31, 2007 for
virtually every rig when compared to the prior
fiscal year period, including
the ATWOOD SOUTHERN CROSS, ATWOOD EAGLE, SEAHAWK, ATWOOD HUNTER, VICKSBURG and ATWOOD
BEACON.
The
RICHMOND
incurred significantly less
operating costs during the
current quarter
as the rig was in a shipyard
undergoing a life enhancing upgrade.
The
AUSTRALIA MANAGEMENT
CONTRACTS
were
terminated during the first quarter of fiscal year 2007.
The decrease
in drilling costs for the
ATWOOD FALCON is primarily attributable to
a significant amount
of
planned
maintenance
performed
during its water depth
upgrade which was completed during the first quarter of
fiscal year 2007.
Other drilling costs
have
remained
relatively consistent with the prior fiscal year period.
Depreciation expense for the
three months ended December 31, 2007 increased 6% compared to the three months ended
December 31, 2006. An analysis of depreciation expense by rig is as follows:
|
DEPRECIATION
EXPENSE
|
|
(In millions)
|
|
Three
Months Ended December 31,
|
|
2007
|
|
2006
|
|
Variance
|
|
|
|
|
|
|
ATWOOD
FALCON
|
$ 1.3
|
|
$ 0.9
|
|
$ 0.4
|
SEAHAWK
|
1.6
|
|
1.5
|
|
0.1
|
ATWOOD
HUNTER
|
1.5
|
|
1.4
|
|
0.1
|
ATWOOD
SOUTHERN CROSS
|
0.9
|
|
0.8
|
|
0.1
|
ATWOOD
BEACON
|
1.3
|
|
1.3
|
|
-
|
VICKSBURG
|
0.7
|
|
0.7
|
|
-
|
ATWOOD
EAGLE
|
1.1
|
|
1.1
|
|
-
|
RICHMOND
|
-
|
|
0.2
|
|
(0.2)
|
OTHER
|
0.1
|
|
0.1
|
|
-
|
|
$
8.5
|
|
$ 8.0
|
|
$ 0.5
|
|
|
|
|
|
|
Depreciation expense has
increased for the
ATWOOD FALCON
due to the completion of its
water depth upgrade during fiscal year 2007.
In
accordance with our company
policy, no depreciation expense was recorded during the current quarter for the RICHMOND,
as the rig was undergoing a life enhancing upgrade. Depreciation
expense for all other
rigs
has remained
relatively consistent with the prior
fiscal year
period.
General and administrative expenses for the
first quarter of fiscal year 2008 increased compared to the
first quarter of
fiscal year
2007
primarily
due
to
rising
personnel costs
which also include an
approximate $0.7 million increase in annual bonus
compensation over the prior fiscal year.
Interest
expense
increased due to the
write
off
of
the remaining
unamortized loan costs of approximately $0.4 million related to the prior credit
facility
which was terminated during the quarter ended
December 31, 2007.
Interest income
increased due to interest earned on higher cash
balances.
Virtually all of our tax
provision for each of the three months ended December 31, 2007 and 2006 relates to taxes in
foreign jurisdictions. Accordingly, due to the high level of operating income earned in
certain nontaxable and deemed profit tax jurisdictions during the three months ended
December 31, 2007 and 2006, our effective tax rate for these periods was
significantly less than the
United States federal statutory rate.
Excluding any
discrete items that may be
incurred, we expect our effective tax rate to be between 10% and 12% for fiscal year
2008.
LIQUIDITY AND CAPITAL
RESOURCES
In October
2007
we entered
into a new credit agreement with several banks and terminated our prior senior secured
credit facility. The new credit agreement provides for a secured 5-year $300,000,000
non-amortizing revolving loan facility with maturity in October 2012, subject to
acceleration upon certain specified events of defaults, including breaches of
representations or covenants. Loans under the new facility will bear interest at varying
rates ranging from 0.70% to 1.25% over the Eurodollar Rate,
depending
upon the ratio of outstanding debt to earnings before interest, taxes and depreciation. The
collateral for the new credit agreement consists primarily of preferred mortgages on three
of our active drilling units (ATWOOD EAGLE, ATWOOD HUNTER and ATWOOD BEACON). The new
credit agreement contains various financial covenants that, among other things, require the
maintenance of certain leverage and interest expense coverage ratios. This new credit
facility will provide funding for future growth opportunities and for general corporate
needs. As of
December 31,
2007 and
February 7,
2008, $50 million has been borrowed under the new credit facility.
Since we operate in a very
cyclical industry, maintaining high equipment utilization in up, as well as down, cycles is
a key factor in generating cash to satisfy current and future obligations. For fiscal years
2001 through 2007, net cash provided by operating activities ranged from a low of
approximately $13.7 million in fiscal year 2003 to a high of approximately $190.8 million
in fiscal year 2007. For the three months ended December 31, 2007, net cash provided by
operating activities totaled approximately $38.9
million. Our operating cash
flows are primarily driven by our operating income, which reflects dayrates and rig
utilization. During the first three months of fiscal year 2008, we used internally
generated cash to expend
approximately
$17
million toward the
construction of the ATWOOD AURORA, approximately
$8
million toward the life
enhancing upgrade of the RICHMOND and approximately
$1
million in other capital
expenditures. We had cash and cash equivalents on hand at December 31, 2007 of
approximately $145
million.
In January 2008, we executed
a construction contract with Jurong Shipyard Pte. Ltd. to construct a Friede & Goldman
ExD Millennium Semisubmersible Drilling Unit, with delivery expected to occur in early
2011. We estimate the total costs of the rig (including capitalized interest) will be $570
million to $590 million. Assuming no additional growth, we estimate that our total capital
expenditures for the last three quarters of
fiscal year 2008 will be
approximately $225
million, with approximately
$55 million and $140 million relating to the construction of the ATWOOD AURORA and the new
semisubmersible drilling unit, respectively. Based upon the current expected capital
commitments for fiscal year 2008, we expect to end fiscal
year 2008
with outstanding long-term
debt of $50 million to $75 million and a debt to total capitalization ratio of less than
10%. Thus,
we expect
to satisfy
most of the
current capital commitments for fiscal year
2008
from internally generated
funds.
Our portfolio of accounts
receivable is comprised of major international corporate entities with stable payment
experience. Historically, we have not encountered significant difficulty in collecting
receivables and typically do not require collateral for our receivables. The increase in
accounts receivable of $12.4 million from September 30, 2007 to December 31, 2007 is
primarily attributable to a large outstanding balance due from one customer that was
subsequently collected in January 2008.
Accrued liabilities have
increased by approximately $10.9 million at December 31, 2007 compared to September 30,
2007 due to additional accrued but unpaid taxes and due to an increase of capital
expenditure liabilities.
Long-term deferred credits have decreased by approximately $4.2 million at December 31,
2007 compared to September 30, 2007 due to the amortization deferred fees associated with
the prior upgrades of the ATWOOD FALCON and SEAHAWK. Lump sum fees received for upgrade
costs reimbursed by our customers are reported as deferred credits in the accompanying
Consolidated Balance Sheets and are recognized as earned on a straight-line method over the
term of the related drilling contract
.
PART I. ITEM
3