Summary of ENSCO INTERNATIONAL INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS ENVIRONMENT
During the first half of 2008, day rates remained at or near record levels for most jackup rig classes, utilization remained high and recently executed contracts continued to include favorable terms and conditions for drilling contractors. In addition, limited rig availability and strong demand have continued to push day rates higher for deepwater drilling rigs on a global basis.
During the first half of 2008, sixteen new jackup and semisubmersible rigs were delivered. Another 125 rigs are reported to be on order or under construction, of which more than 30 are scheduled for delivery during the remainder of 2008. We anticipate that demand for drilling rigs will continue to grow given the relatively high oil and gas prices, and that there will be sufficient rig demand to absorb new rig supply through the remainder of 2008. For additional information concerning the effects these new drilling rigs may have on our business, our industry, global supply, day rates and utilization, including potential risks and uncertainties, see "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the year ended December 31, 2007, as updated in this report.
Asia Pacific
Jackup rig drilling contracts in the Asia Pacific region have historically been for substantially longer durations than those in other geographic regions. Since day rates for such contracts generally are fixed, or fixed subject to adjustment for variations in the drilling contractor's costs, our Asia Pacific operations generally are not subject to the same level of day rate volatility as other regions where shorter term contracts are more prevalent. During 2007, demand for jackup rigs in the region exceeded the supply of available rigs, enabling drilling contractors to realize high day rates and utilization. During the first half of 2008, pressure from newbuild jackup rigs scheduled for delivery caused day rates in certain markets of the region to moderate, but continued demand enabled drilling contractors to sustain high utilization rates. While continued deliveries of newbuild jackups leave the region at risk of oversupply, many newbuilds are being marketed outside the region and, therefore, we do not anticipate that newbuild deliveries will exert significant additional downward pressure on day rates or utilization in the Asia Pacific region.
Europe/Africa
Our Europe/Africa offshore drilling operations are mainly conducted in northern Europe (North Sea) where moderate duration jackup rig contracts are prevalent. During 2007, a shortfall of available jackup rigs combined with the continued increase in spending by oil and gas companies in the region led to increased day rates. During the first half of 2008, shortfalls in rig availability continued, causing a slight increase in day rates over the prior year. Although it is expected that several newbuild jackup rigs will be added to the region, based on current demand and the slight undersupply of jackup rigs, a balanced market and relatively stable day rates are expected through the remainder of the year.
North and South America
Our North and South America offshore drilling operations are mainly conducted in the Gulf of Mexico where jackup rig contracts are normally entered into for relatively short durations and day rates are adjusted to current market rates upon contract renewal. Therefore, day rates in the region are more volatile than in regions where longer duration contracts are more prevalent. During 2007, demand declined and day rates softened compared to prior levels as a result of competition for work among drilling contractors, particularly related to smaller premium jackup rigs. Oil and gas companies continued to shift their focus to more economically attractive prospects in the deeper waters of the Gulf of Mexico and elsewhere. Drilling contractors continued to pursue international opportunities and, despite relocation of several jackup rigs from the region in 2007, rig demand decreased at a faster pace than supply.

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Demand for jackup rigs in the Gulf of Mexico has increased steadily during the first half of 2008 from year-end 2007 levels. As a result, utilization levels began to improve in early 2008 and day rates began to increase during the second quarter. Several oil and gas companies have confirmed new jackup rig programs in the Gulf of Mexico and multiple jackup rigs in the region have received contract extensions upon expiration of their commitments.
Demand for deepwater semisubmersible rigs in the Gulf of Mexico continued to outpace supply resulting in high day rates and utilization during the first half of 2008. Despite the lack of available deepwater rigs in the region, several oil and gas companies have issued semisubmersible requirements. Currently, demand for deepwater drilling is the driving force behind Gulf of Mexico offshore exploration, and we expect semisubmersible rig utilization to remain near 100% in the region.
In addition to the ENSCO 7500 deepwater semisubmersible rig currently operating in the Gulf of Mexico, we have six ENSCO 8500 Series® ultra-deepwater semisubmersible rigs under construction with scheduled delivery dates in the third quarter of 2008, the second and fourth quarters of 2009, the third quarter of 2010, the second half of 2011 and the first half of 2012. The first four rigs to be delivered have secured long-term drilling contracts in the Gulf of Mexico.

RESULTS OF OPERATIONS
    The following table highlights our condensed consolidated results of
operations for the three-month and six-month periods ended June 30, 2008 and
2007 (in millions):



                                                     Three Months Ended                    Six Months Ended
                                                          June 30,                            June 30,
                                                      2008              2007             2008          2007

  Revenues                                               $637.1            $548.6       $1,217.4     $1,062.7
  Operating expenses
   Contract drilling (exclusive of depreciation)          214.4             168.8          405.1        331.6
   Depreciation                                            48.4              46.8           95.9         91.9
   General and administrative                              13.8              19.1           26.5         35.1
---------------------------------------------------------------------------------------------------------------
  Operating income                                        360.5             313.9          689.9        604.1
  Other income (expense)                                    6.8               7.8           11.3         17.4
  Provision for income taxes                               70.6              67.3          132.5        134.8
---------------------------------------------------------------------------------------------------------------
  Net income                                             $296.7            $254.4       $  568.7     $  486.7
---------------------------------------------------------------------------------------------------------------

For the three-month and six-month periods ended June 30, 2008, operating income increased by $46.6 million, or 15%, and $85.8 million, or 14%, respectively, over the comparable prior year periods. The increases were primarily due to improved average day rates earned by our international jackup rigs and Gulf of Mexico semisubmersible rig and improved utilization of our Gulf of Mexico jackup rigs, partially offset by a reduction in average day rates earned by our Gulf of Mexico jackup rigs and increased repair and maintenance expense and personnel costs across our entire fleet. Detailed explanations of our results of operations for the three-month and six-month periods ended June 30, 2008 and 2007, including discussions of revenues and contract drilling expense based on geographic region and type of rig, are set forth below.

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Revenues and Contract Drilling Expense
    The following analysis summarizes our revenues, contract drilling expense,
rig utilization and average day rates for the three-month and six-month periods
ended June 30, 2008 and 2007 (in millions, except utilization and day rates):



                                                Three Months Ended         Six Months Ended
                                                    June 30,                    June 30,
                                               2008           2007          2008        2007

Revenues
   Jackup rigs:
     Asia Pacific                              $257.4        $223.6      $  507.5     $  422.4
     Europe/Africa                              201.8         173.3         393.6        321.5
     North and South America                    139.2         129.2         247.9        273.4
------------------------------------------------------------------------------------------------
       Total jackup rigs                        598.4         526.1       1,149.0      1,017.3

   Semisubmersible rig - North America           32.6          18.0          57.2         35.7
   Barge rig - Asia Pacific                       6.1           4.5          11.2          9.7
------------------------------------------------------------------------------------------------
         Total                                 $637.1        $548.6      $1,217.4     $1,062.7
------------------------------------------------------------------------------------------------

Contract Drilling Expense
   Jackup rigs:
     Asia Pacific                              $ 87.9        $ 63.5        $161.9       $124.4
     Europe/Africa                               64.2          52.3         122.1        100.0
     North and South America                     50.0          43.9          97.8         88.7
------------------------------------------------------------------------------------------------
       Total jackup rigs                        202.1         159.7         381.8        313.1

   Semisubmersible rigs - North America           9.7           6.6          18.2         12.7
   Barge rig - Asia Pacific                       2.6           2.5           5.1          5.8
------------------------------------------------------------------------------------------------
         Total                                 $214.4        $168.8        $405.1       $331.6
------------------------------------------------------------------------------------------------

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                                                Three Months Ended            Six Months Ended
                                                    June 30,                      June 30,
                                               2008           2007           2008          2007
Rig Utilization(1)
    Jackup rigs:
      Asia Pacific                                91%           99%            94%            99%
      Europe/Africa                               97%          100%            98%            98%
      North and South America                    100%           82%            96%            84%
---------------------------------------------------------------------------------------------------
         Total jackup rigs                        95%           93%            95%            93%

    Semisubmersible rig - North America           98%           97%            97%            97%
    Barge rig - Asia Pacific                     100%           80%            96%            90%
---------------------------------------------------------------------------------------------------
            Total                                 96%           93%            95%            93%
---------------------------------------------------------------------------------------------------

  Average Day Rates(2)
    Jackup rigs:
      Asia Pacific                           $152,906      $134,929       $148,023       $127,839
      Europe/Africa                           217,710       195,211        215,435        189,208
      North and South America                  97,750       113,696         93,862        115,846
---------------------------------------------------------------------------------------------------
        Total jackup rigs                     148,214       142,895        145,424        138,077

    Semisubmersible rig - North America       365,496       200,188        323,215        197,977
    Barge rig - Asia Pacific                   72,132        65,788         72,450         59,948
---------------------------------------------------------------------------------------------------
            Total                            $151,635      $143,153       $148,092       $137,984
---------------------------------------------------------------------------------------------------

(1) Utilization was derived by dividing the number of days under contract, including days associated with compensated mobilizations, by the number of days in the period.

(2) Average day rates were derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues and lump sum revenues, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations, shipyard contracts and standby contracts.

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The following table summarizes our offshore drilling rigs by geographic region and type as of June 30, 2008 and 2007:

                                        Number of Rigs

                                      2008       2007

  Jackup rigs:
    Asia Pacific                       19         19
    Europe/Africa                      10         10
    North and South America            15         15
----------------------------------------------------
      Total jackup rigs                44         44
  Semisubmersible rigs:
    North America                      1           1
    Under construction(1)              6           4
--------------------------------------------------------
      Total semisubmersible rigs       7           5
  Barge rig - Asia Pacific             1           1
--------------------------------------------------------
        Total                          52         50
--------------------------------------------------------

(1) During the second quarter of 2008, we entered into agreements to construct ENSCO 8504 and ENSCO 8505 with delivery expected in the second half of 2011 and the first half of 2012, respectively.

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Asia Pacific Jackup Rigs
Asia Pacific jackup rig revenues for the quarter ended June 30, 2008 increased by $33.8 million, or 15%, as compared to the prior year quarter. The increase in revenues was primarily due to a 13% increase in average day rates and the increased size of the Asia Pacific fleet, partially offset by a decline in utilization to 91% from 99% during the comparable prior year quarter. The increase in average day rates resulted from stronger demand due to higher levels of spending by oil and gas companies coupled with relatively limited rig availability in the region. The addition of ENSCO 108 to the fleet contributed $9.5 million to the increase in Asia Pacific jackup rig revenues over the comparable prior year quarter. We accepted delivery of ENSCO 108 late in the first quarter of 2007 upon completion of its construction, with drilling operations commencing during the second quarter of 2007. The decline in utilization was the result of scheduled maintenance projects on ENSCO 56, ENSCO 57 and ENSCO 96 during the current year quarter. Contract drilling expense increased by $24.4 million, or 38%, as compared to the prior year quarter primarily due to increased repair and maintenance expense associated with the aforementioned projects and increased personnel costs.
For the six-month period ended June 30, 2008, Asia Pacific jackup rig revenues increased by $85.1 million, or 20%, as compared to the prior year period. The increase in revenues was primarily due to a 16% increase in average day rates and the increased size of the Asia Pacific jackup fleet, partially offset by a decline in utilization to 94% from 99% during the comparable prior year period. The increase in average day rates resulted from an increase in demand due to higher levels of spending by oil and gas companies coupled with relatively limited rig availability in the region. The addition of ENSCO 108 to the fleet contributed $28.0 million to the increase in Asia Pacific jackup rig revenues over the comparable prior year period. The decline in utilization occurred due to scheduled maintenance projects on ENSCO 56, ENSCO 57 and ENSCO
96. Contract drilling expense increased by $37.5 million, or 30%, as compared to the prior year period primarily due to the aforementioned maintenance projects, increased personnel costs and the increased size of the fleet.
Europe/Africa Jackup Rigs
Europe/Africa jackup rig revenues for the quarter ended June 30, 2008 increased by $28.5 million, or 16%, as compared to the prior year quarter. The increase in revenues was primarily due to a 12% increase in average day rates and, to a lesser extent, the addition of ENSCO 105 to the Europe/Africa jackup fleet in April 2007, which contributed an additional $9.6 million of revenues over the comparable prior year quarter. The improvement in average day rates was attributable to improved demand resulting from increased spending by oil and gas companies and limited rig availability in the region. Contract drilling expense increased by $11.9 million, or 23%, from the comparable prior year quarter primarily due to increased mobilization expense, the addition of ENSCO 105 to the fleet and increased repair and maintenance expense, partially offset by a reduction in reimbursable expenses.
For the six-month period ended June 30, 2008, Europe/Africa jackup rig revenues increased by $72.1 million, or 22%, compared to the prior year period. The increase was primarily due to a 14% increase in average day rates as well as the addition of ENSCO 105 to the Europe/Africa fleet, which contributed an additional $32.2 million of revenues as compared to the prior year period. The improvement in average day rates was attributable to improved demand resulting from increased spending by oil and gas companies and limited rig availability in the region. Contract drilling expense increased by $22.1 million, or 22%, compared to the prior year period. The increase in contract drilling expense was primarily due to the addition of ENSCO 105 to the fleet, which resulted in an additional $8.6 million of contract drilling expense as compared to the prior year period, as well as increased mobilization expense, repair and maintenance expense and personnel costs, partially offset by a reduction in reimbursable expenses.

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North and South America Jackup Rigs
North and South America jackup rig revenues for the quarter ended June 30, 2008 increased by $10.0 million, or 8%, compared to the prior year quarter. The increase in revenues was due to an increase in utilization to 100% from 82% in the comparable prior year quarter, partially offset by a 14% decrease in average day rates. Both the increase in utilization and decline in average day rates were a function of significant supply and demand imbalance that existed during the latter half of the prior year. As oil and gas companies shifted their focus to deepwater projects during 2007, jackup rig utilization declined rapidly and we subsequently dropped day rates to obtain contracts. As a result of both decreased rig supply and increased customer demand, utilization levels improved significantly during 2008. Contract drilling expense increased by $6.1 million, or 14%, compared to the prior year quarter, primarily due to increased personnel costs and the impact of increased utilization.
For the six-month period ended June 30, 2008, North and South America jackup rig revenues decreased by $25.5 million, or 9%, compared to the prior year period. The decrease in revenues was primarily due to a 19% decrease in average day rates and the relocation of ENSCO 105 from the region, partially offset by an increase in utilization to 96% from 84% in the comparable prior year period. Both the decrease in average day rates and increase in utilization were primarily attributable to the supply and demand imbalance that existed throughout the prior year and improvement in market conditions during the first half of 2008, as discussed in the previous paragraph. Revenues also declined as a result of ENSCO 105, which generated $7.1 million of revenues and incurred $2.0 million of contract drilling expense during the first quarter of 2007 prior to mobilization from the Gulf of Mexico to Tunisia. Contract drilling expense increased by $9.1 million, or 10%, compared to the prior year period. The increase was primarily due to increased personnel costs and the impact of increased utilization, partially offset by decreased mobilization expense and the relocation of ENSCO 105 during the comparable prior year period.
North America Semisubmersible Rigs
Revenues for the quarter ended June 30, 2008 for ENSCO 7500 increased by $14.6 million, or 81%, and contract drilling expense increased by $3.1 million, or 47%, as compared to the prior year quarter. The increase in revenues was primarily due to an increase in average day rate to $365,496 from $200,188 in the comparable prior year quarter, as ENSCO 7500 began earning a significantly higher day rate during February 2008. The increase in contract drilling expense is primarily due to increased repair and maintenance expense and personnel costs.
For the six-month period ended June 30, 2008, revenues for ENSCO 7500 increased by $21.5 million, or 60%, and contract drilling expense increased by $5.5 million, or 43%, as compared to the prior year period. The increase in revenues was due to an increase in average day rate to $323,215 from $197,977 in the comparable prior year period, as ENSCO 7500 began earning a significantly higher day rate during February 2008. The increase in contract drilling expense was primarily due to increased personnel costs and repair and maintenance expense. Beginning in the second quarter of 2007, ENSCO 7500 staffing levels were increased to facilitate training in preparation for delivery of our ENSCO 8500 Series® rigs.
Depreciation
Depreciation expense for the quarter ended June 30, 2008 increased by $1.6 million, or 3%, as compared to the prior year quarter. The increase was primarily attributable to depreciation associated with ENSCO 83 and ENSCO 93 capital enhancement and upgrade projects completed during the second quarter of 2007 and first quarter of 2008, respectively.

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Depreciation expense for the six-month period ended June 30, 2008 increased by $4.0 million, or 4%, as compared to the prior year period. The increase was primarily attributable to depreciation associated with the ENSCO 83 and ENSCO 93 capital enhancement projects, depreciation on ENSCO 108, which was placed into service in April 2007, and depreciation on other minor upgrades and improvements completed subsequent to the second quarter of 2007. General and Administrative
General and administrative expense for the quarter ended June 30, 2008 decreased by $5.3 million, or 28%, as compared to the prior year quarter. The decrease was attributable to a $6.8 million expense incurred during the prior year quarter in connection with a retirement agreement with our former Chairman and Chief Executive Officer, partially offset by increased professional fees.
General and administrative expense for the six-month period ended June 30, 2008 decreased by $8.6 million, or 25%, as compared to the prior year period. The decrease was attributable to a $10.7 million expense incurred during the prior year period in connection with a retirement agreement with our former Chairman and Chief Executive Officer, partially offset by increased professional fees.
Other Income (Expense)
The following table summarizes other income (expense) for the three-month and six-month periods ended June 30, 2008 and 2007 (in millions):

                             Three Months Ended            Six Months Ended
                                 June 30,                      June 30,
                              2008         2007         2008            2007

  Interest income                $3.7          $6.3        $ 8.7          $12.5
  Interest expense, net:
    Interest expense             (5.1 )        (8.2 )      (10.8 )        (16.8 )
    Capitalized interest          5.1           7.4         10.8           14.9
---------------------------------------------------------------------------------
                                   --           (.8 )         --           (1.9 )
   Other, net                     3.1           2.3          2.6            6.8
---------------------------------------------------------------------------------
                                 $6.8          $7.8        $11.3          $17.4
---------------------------------------------------------------------------------

Interest income for the three-month and six-month periods ended June 30, 2008 decreased as compared to the respective prior year periods due to lower average interest rates, partially offset by an increase in amounts invested. Interest expense decreased during the same periods due to a decrease in outstanding debt.

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Other, net, for the quarter ended June 30, 2008 included net foreign currency exchange gains of $3.3 million. Other, net, for the six-month period ended June 30, 2008 included net foreign currency exchange gains of $5.8 million, partially offset by an unrealized loss of $3.3 million associated with the valuation of our auction rate securities. Our fair value measurements are discussed in Note 8 to the condensed consolidated financial statements.
Other, net, for the three-month and six-month periods ended June 30, 2007 included net foreign currency exchange gains of $1.6 million and $2.7 million, respectively. Other, net, for the six-month period ended June 30, 2007 also included a $3.1 million net gain resulting from the settlement of litigation we initiated in relation to a non-operational dispute with a third party service provider.
Provision for Income Taxes
The provision for income taxes for the quarter ended June 30, 2008 increased by $3.3 million as compared to the prior year quarter. The increase was attributable to increased profitability, partially offset by a reduction in the effective tax rate from 20.9% for the quarter ended June 30, 2007 to 19.2% for the quarter ended June 30, 2008 due to an increase in the relative portion of our earnings generated by foreign subsidiaries whose earnings are being permanently reinvested and taxed at lower rates.
The provision for income taxes for the six-month period ended June 30, 2008 decreased by $2.3 million as compared to the prior year period. The decrease was attributable to a reduction in the effective tax rate from 21.7% for the six-month period ended June 30, 2007 to 18.9% for the six-month period ended June 30, 2008 due to an increase in the relative portion of our earnings generated by foreign subsidiaries as noted above, partially offset by increased profitability.
Fair Value Measurements
Our auction rate securities were measured at fair value using significant Level 3 inputs as of June 30, 2008. See Note 3 to our condensed consolidated financial statements for additional information on our auction rate securities, including a description of the securities and underlying collateral, a . . .