Summary of ENSCO INTERNATIONAL INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS ENVIRONMENT
During the first nine months 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 recent months, there has been substantial volatility and a decline in oil and gas prices due to the deteriorating global economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing is uncertain. These conditions could have an adverse effect on our business environment. Our customers may curtail their drilling programs, which could result in a decrease in demand for drilling rigs and a reduction in day rates and/or utilization. In addition, certain of our customers could experience an inability to pay suppliers, including our Company, in the event they are unable to access the capital markets to fund their business operations. During the first nine months of 2008, more than 20 new jackup and semisubmersible rigs were delivered and another 125 are reported to be on order or under construction. It is uncertain whether current volatility in oil and gas prices and uncertainty in the capital markets will affect the delivery of rigs currently on order or under construction.
For additional information concerning the effects of the volatility in oil and gas prices and uncertainty in the capital markets, see "Item 1A. Risk Factors" in Part II of this report. For additional information concerning the effects 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 Rigs
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 nine months of 2008, day rates stabilized and utilization rates remained high as increased rig demand was largely offset by new rig deliveries. We are uncertain how continued new rig deliveries will impact the region during the remainder of the year.
Europe/Africa Jackup Rigs
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 nine months of 2008, shortfalls in rig availability continued, causing a slight increase in day rates over the prior year. Although several newbuild jackup rigs are expected to be added to the region, we anticipate a balanced market and relatively stable day rates through the remainder of the year.

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North and South America Jackup Rigs
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 extension or renewal. Therefore, jackup rig day rates in the region are more volatile than in regions where longer duration contracts are more prevalent. During 2007, day rates softened compared to prior levels as a result of decreased demand and competition for work among drilling contractors as oil and gas companies shifted 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 but, despite the relocation of several jackup rigs from the region in 2007, jackup rig demand decreased at a faster pace than supply.
Demand for jackup rigs in the Gulf of Mexico has increased steadily during the first nine months of 2008 as compared to 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. In September 2008, Hurricane Gustav and Hurricane Ike forced more than two weeks of work stoppages and damaged or destroyed several rigs and platforms in the Gulf of Mexico, thereby reducing the supply of available jackup rigs. It is uncertain how the disruption from these two hurricanes, the reduced supply of available rigs and the recent reduction in oil and natural gas prices will affect demand in the region during the remainder of the year.
Semisubmersible Rigs
Demand for deepwater semisubmersible rigs continued to outpace supply resulting in high day rates and utilization during the first nine months of 2008. Despite two hurricanes striking the Gulf of Mexico in September, the deepwater semisubmersible rig fleet suffered relatively little damage. Increased deepwater exploration and development activity continues to drive strong demand for deepwater drilling rigs on a global basis, and we expect semisubmersible rig utilization to remain near 100% for the remainder of the year and into 2009.
The ENSCO 8500 ultra-deepwater semisubmersible rig was delivered during the third quarter and is currently mobilizing to the Gulf of Mexico to commence operations under a long-term drilling contract. We have six additional ENSCO 8500 Series® rigs under construction with scheduled delivery dates in the second and fourth quarter of 2009, the third quarter of 2010, the second half of 2011 and the first and second half of 2012. Three of the six ENSCO 8500 Series® rigs under construction have secured long-term drilling contracts in the Gulf of Mexico. Our ENSCO 7500 ultra-deepwater semisubmersible rig secured a new long-term contract for work offshore Australia during the third quarter of 2008 and is expected to mobilize from the Gulf of Mexico to Australia during the fourth quarter of 2008.

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


                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                September 30,
                                                 2008            2007           2008         2007

  Revenues                                        $635.8          $536.4      $1,828.3     $1,570.9
  Operating expenses
   Contract drilling (exclusive of
depreciation)                                      193.4           175.5         591.5        500.6
   Depreciation                                     47.7            46.2         141.6        136.0
   General and administrative                       15.2            11.5          41.7         46.6
-----------------------------------------------------------------------------------------------------
  Operating income                                 379.5           303.2       1,053.5        887.7
  Other income (expense)                            (6.5 )           9.8           4.8         27.2
  Provision for income taxes                        71.8            53.6         198.8        181.6
-----------------------------------------------------------------------------------------------------
  Income from continuing operations                301.2           259.4         859.5        733.3
  (Loss) income from discontinued
operations, net                                    (18.9 )           7.3          (8.5 )       20.1
-----------------------------------------------------------------------------------------------------
  Net income                                      $282.3          $266.7      $  851.0     $  753.4
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For the quarter ended September 30, 2008, revenues increased by $99.4 million, or 19%, and operating income increased by $76.3 million, or 25%, as compared to the prior year quarter. For the nine-month period ended September 30, 2008, revenues increased by $257.4 million, or 16%, and operating income increased by $165.8 million, or 19%, as compared to the prior year period. The increases were primarily due to improved average day rates earned by our international jackup rigs and ENSCO 7500 ultra-deepwater semisubmersible rig and improved utilization of our Gulf of Mexico jackup rigs, partially offset by increased personnel costs and repair and maintenance expense across the majority of our fleet. Revenues and operating income increases realized during the nine-month period ended September 30, 2008 were also partially offset by a reduction in day rates earned by our Gulf of Mexico jackup rigs as compared to the prior year period.
Detailed explanations of our operating results for the three-month and nine-month periods ended September 30, 2008 and 2007, including discussions of revenues and contract drilling expense based on geographical location and type of rig, are set forth below.
Revenues and Contract Drilling Expense
The following analysis summarizes our revenues, contract drilling expense, rig utilization and average day rates from continuing operations for the three-month and nine-month periods ended September 30, 2008 and 2007 (in millions, except utilization and day rates):

                                                Three Months Ended         Nine Months Ended
                                                  September 30,              September 30,
                                               2008           2007         2008         2007

Revenues
   Jackup rigs:
     Asia Pacific                              $257.8        $229.3      $  765.3     $  651.7
     Europe/Africa                              209.3         174.3         602.9        495.8
     North and South America                    138.6         107.2         361.6        352.4
------------------------------------------------------------------------------------------------
       Total jackup rigs                        605.7         510.8       1,729.8      1,499.9

   Semisubmersible rig - North America           27.1          18.7          84.3         54.4
   Barge rig - Asia Pacific                       3.0           6.9          14.2         16.6
------------------------------------------------------------------------------------------------
         Total                                 $635.8        $536.4      $1,828.3     $1,570.9
------------------------------------------------------------------------------------------------

Contract Drilling Expense
   Jackup rigs:
     Asia Pacific                              $ 73.9        $ 65.4        $235.8       $189.8
     Europe/Africa                               62.8          57.1         184.9        157.1
     North and South America                     45.6          42.0         136.4        124.2
------------------------------------------------------------------------------------------------
       Total jackup rigs                        182.3         164.5         557.1        471.1

   Semisubmersible rigs - North America           8.3           8.3          26.5         21.0
   Barge rig - Asia Pacific                       2.8           2.7           7.9          8.5
------------------------------------------------------------------------------------------------
         Total                                 $193.4        $175.5        $591.5       $500.6
------------------------------------------------------------------------------------------------

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                                                Three Months Ended            Nine Months Ended
                                                   September 30,                 September 30,
                                                2008           2007           2008           2007
Rig Utilization(1)
    Jackup rigs:
      Asia Pacific                                96%           99%             95%             99%
      Europe/Africa                               96%           90%             97%             95%
      North and South America                     98%           77%             96%             81%
-----------------------------------------------------------------------------------------------------
         Total jackup rigs                        97%           90%             96%             92%

    Semisubmersible rig - North America           87%           97%             93%             97%
    Barge rig - Asia Pacific                      50%          100%             81%             93%
-----------------------------------------------------------------------------------------------------
            Total                                 96%           90%             96%             92%
-----------------------------------------------------------------------------------------------------

  Average Day Rates(2)
    Jackup rigs:
      Asia Pacific                           $156,951      $132,876        $150,956        $129,563
      Europe/Africa                           226,080       203,117         219,021         193,882
      North and South America                 108,174       106,183          96,810         110,482
-----------------------------------------------------------------------------------------------------
        Total jackup rigs                     156,860       142,118         149,436         139,133

    Semisubmersible rig - North America       361,612       200,716         334,688         198,900
    Barge rig - Asia Pacific                   73,080        71,496          72,576          64,439
-----------------------------------------------------------------------------------------------------
            Total                            $160,077      $141,785        $152,288        $138,977
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(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 September 30, 2008 and 2007:

                                        Number of Rigs

                                      2008        2007

  Jackup rigs:
    Asia Pacific                         19         19
    Europe/Africa                        10         10
    North and South America(1)           14         14
--------------------------------------------------------
      Total jackup rigs                  43         43
  Semisubmersible rigs:
    North America(2)                     2           1
    Under construction(2)(3)             6           4
--------------------------------------------------------
      Total semisubmersible rigs         8           5
  Barge rig - Asia Pacific               1           1
--------------------------------------------------------
        Total(1)                        52          49
--------------------------------------------------------

(1) Excludes rigs classified as discontinued operations.

(2) During the third quarter of 2008, we accepted delivery of ENSCO 8500 which is currently mobilizing to the Gulf of Mexico from Singapore and is expected to commence drilling operations in the Gulf of Mexico during the first quarter of 2009.

(3) During the first nine months of 2008, we entered into agreements to construct ENSCO 8504, ENSCO 8505 and ENSCO 8506 with delivery expected in the second half of 2011 and the first and second half of 2012, respectively.

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Asia Pacific Jackup Rigs
Asia Pacific jackup rig revenues for the quarter ended September 30, 2008 increased by $28.5 million, or 12%, as compared to the prior year quarter. The increase in revenues was primarily due to an 18% increase in average day rates, partially offset by a decline in utilization to 96% from 99% during the comparable prior year quarter. 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 decline in utilization was primarily the result of scheduled maintenance on ENSCO 54 during the current year quarter. Contract drilling expense increased by $8.5 million, or 13%, as compared to the prior year quarter primarily due to increased personnel costs and, to a lesser extent, increased repair and maintenance expense associated with the aforementioned maintenance project.
For the nine-month period ended September 30, 2008, Asia Pacific jackup rig revenues increased by $113.6 million, or 17%, as compared to the prior year period. The increase in revenues was primarily due to a 17% increase in average day rates and the increased size of the Asia Pacific jackup fleet, partially offset by a decline in utilization to 95% 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 late in the first quarter of 2007 resulted in an additional $28.0 million of revenues and $5.8 million of contract drilling expense as compared to the prior year period. The decline in utilization was the result of scheduled maintenance projects on ENSCO 54, ENSCO 56, ENSCO 57 and ENSCO 96. Contract drilling expense increased by $46.0 million, or 24%, as compared to the prior year period primarily due to increased personnel costs, the aforementioned maintenance projects and the addition of ENSCO 108 to the fleet.
Europe/Africa Jackup Rigs
Europe/Africa jackup rig revenues for the quarter ended September 30, 2008 increased by $35.0 million, or 20%, as compared to the prior year quarter. The increase in revenues was primarily due to an 11% increase in average day rates and an increase in utilization to 96% from 90% during the comparable prior year quarter. The increase in average day rates was attributable to limited rig availability in the region coupled with improved demand resulting from increased spending by oil and gas companies. The increase in utilization was primarily due to the mobilization of ENSCO 100 from Nigeria to the North Sea during the comparable prior year quarter. ENSCO 100 was fully utilized during the quarter ended September 30, 2008. Contract drilling expense increased by $5.7 million, or 10%, as compared to the prior year quarter primarily due to increased mobilization expense and repair and maintenance expense, partially offset by costs incurred in the prior year quarter related to the departure of ENSCO 100 from Nigeria.
For the nine-month period ended September 30, 2008, Europe/Africa jackup rig revenues increased by $107.1 million, or 22%, as compared to the prior year period. The increase was primarily due to a 13% increase in average day rates and an increase in utilization to 97% from 95% during the comparable prior year period. The improvement in average day rates was attributable to limited rig availability in the region coupled with improved demand resulting from increased spending by oil and gas companies. The increase in utilization was due to the mobilization of ENSCO 100 during the comparable prior year period as discussed in the preceding paragraph. In addition, the relocation of ENSCO 105 to the Europe/Africa region during the second quarter of 2007 contributed an additional $32.4 million of revenues and $8.8 million of contract drilling expense as compared to the prior year period. Contract drilling expense increased by $27.8 million, or 18%, as compared to the prior year period. The increase in contract drilling expense was primarily due to increased mobilization expense, the addition of ENSCO 105 to the fleet and increased 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 September 30, 2008 increased by $31.4 million, or 29%, as compared to the prior year quarter. The increase in revenues was primarily due to an increase in utilization to 98% from 77% in the comparable prior year quarter and, to a lesser extent, a 2% increase in average day rates. The increase in utilization was attributable to decreased rig supply, as drilling contractors mobilized rigs to international locations, and an increase in customer demand. Contract drilling expense increased by $3.6 million, or 9%, as compared to the prior year quarter, primarily due to increased personnel costs and the impact of increased utilization, partially offset by decreased mobilization expense and repair and maintenance expense.
For the nine-month period ended September 30, 2008, North and South America jackup rig revenues increased by $9.2 million, or 3%, as compared to the prior year period. The increase in revenues was primarily due to an increase in utilization to 96% from 81% in the comparable prior year period, partially offset by a 12% decrease in average day rates. The increase in utilization was primarily attributable to the improvement in market conditions during 2008, as discussed in the previous paragraph. Although we realized day rate increases during the second and third quarter of 2008, day rates earned during the current year were generally lower than day rates earned during the early portions of 2007. The increase in revenues was also partially offset by ENSCO 105, which generated $7.1 million of revenues and $2.0 million of contract drilling expense during the first quarter of 2007 prior to relocation from the region. Contract drilling expense increased by $12.2 million, or 10%, as 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.
Semisubmersible Rigs
Revenues for the quarter ended September 30, 2008 for ENSCO 7500 increased by $8.4 million, or 45%, as compared to the prior year quarter. The increase in revenues was primarily due to an 80% increase in the average day rate as compared to the prior year quarter, as ENSCO 7500 began earning a significantly higher day rate during February 2008. Contract drilling expense totaled $8.3 million for the quarters ended September 30, 2008 and 2007, as increased personnel costs were offset by decreased repair and maintenance expense.
For the nine-month period ended September 30, 2008, revenues for ENSCO 7500 increased by $29.9 million, or 55%, and contract drilling expense increased by $5.5 million, or 26%, as compared to the prior year period. The increase in revenues was primarily due to a 68% increase in the average day rate as compared to the prior year period. 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 September 30, 2008 increased by $1.5 million, or 3%, as compared to the prior year quarter. The increase was primarily attributable to depreciation associated with the ENSCO 93 capital enhancement and upgrade project completed during the first quarter of 2008 and depreciation on other minor upgrades and improvements completed subsequent to the third quarter of 2007.
Depreciation expense for the nine-month period ended September 30, 2008 increased by $5.6 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 completed during the second quarter of 2007 and first quarter of 2008, respectively, depreciation on ENSCO 108, which was placed into service in April 2007, and depreciation on other minor upgrades and improvements completed subsequent to the third quarter of 2007.

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General and Administrative
General and administrative expense for the quarter ended September 30, 2008 increased by $3.7 million, or 32%, as compared to the prior year quarter. The increase was primarily attributable to increased professional fees, increased personnel costs and costs associated with our branding initiative launched in August 2008.
General and administrative expense for the nine-month period ended September 30, 2008 decreased by $4.9 million, or 11%, as compared to the prior year period. The decrease was primarily 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, increased personnel costs and costs associated with our branding initiative.
Other Income (Expense)
The following table summarizes other income (expense) for the three-month and nine-month periods ended September 30, 2008 and 2007 (in millions):

                             Three Months Ended          Nine Months Ended
                               September 30,               September 30,
                              2008         2007         2008           2007

  Interest income                 $3.2        $7.1        $11.9        $19.6
  Interest expense, net:
    Interest expense              (5.5 )      (8.6 )      (16.3 )      (25.4 )
    Capitalized interest           5.5         8.6         16.3         23.5
------------------------------------------------------------------------------
                                    --          --           --         (1.9 )
   Other, net                     (9.7 )       2.7         (7.1 )        9.5
------------------------------------------------------------------------------
                                 $(6.5 )      $9.8        $ 4.8        $27.2
------------------------------------------------------------------------------

Interest income for the three-month and nine-month periods ended September 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.
Other, net, for the quarter ended September 30, 2008 included net foreign currency exchange losses of $10.1 million. Our net foreign currency exchange losses were primarily due to the strengthening of the U.S. dollar relative to . . .