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DO > SEC Filings for DO > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for DIAMOND OFFSHORE DRILLING INC

Form 10-Q for DIAMOND OFFSHORE DRILLING INC


25-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited consolidated financial statements (including the notes thereto) included elsewhere in this report and our audited consolidated financial statements and the notes thereto, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 1A, "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011. References to "Diamond Offshore," "we," "us" or "our" mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.

We provide contract drilling services to the energy industry around the globe and are a leader in offshore drilling. Our fleet of 44 offshore drilling rigs, including cold-stacked units, consists of 32 semisubmersibles, seven jack-ups and five dynamically positioned drillships, four of which are under construction. We expect two of our new drillships to be delivered in the second and fourth quarters of 2013 and the remaining two drillships under construction to be delivered in the second and fourth quarters of 2014. Our semisubmersible fleet includes the Ocean Onyx, which is under construction in Brownsville, Texas, and the Ocean Apex, a moored semisubmersible rig capable of operating in water depths up to 6,000 feet, which is under construction in Singapore. We expect the Ocean Onyx and the Ocean Apex to be delivered in the third quarter of 2013 and second quarter of 2014, respectively.

During the first nine months of 2012, we sold six of our jack-up rigs, including four rigs that had been cold stacked in previous periods. We also began construction of the Ocean Apex in the third quarter of 2012, utilizing the hull of one of our mid-water floaters that previously had been cold stacked. At September 30, 2012, our fleet included two mid-water semisubmersibles and one jack-up rig that are cold stacked.

Overview

International Floater Market

Internationally, the ultra-deepwater and deepwater floater markets are generally strong and continue to show signs of further strengthening, particularly in the ultra-deepwater segment where there are reportedly no uncontracted rigs available to work in 2012. Third quarter 2012 analyst data indicates that this market is expected to remain strong into 2013. We believe that the decreasing availability of rigs in this market will continue to put upward pressure on dayrates during the remainder of 2012. However, due to our contracted backlog in 2013, we have limited availability in this market and may not be able to benefit from higher price fixtures during that period See "- Contract Drilling Backlog".

In addition, based on third quarter 2012 analyst data, there are over 90 floater rigs, primarily ultra-deepwater and deepwater units, on order or under construction, including 33 rigs to be built on behalf of Petróleo Brasileiro S.A., or Petrobras. Not counting the 33 Petrobras rigs, nearly 40% of the floaters scheduled for delivery in 2013 and nearly 70% of the floaters scheduled for delivery in 2014 and beyond are not yet contracted for future work, including two of our drillships under construction and the Ocean Apex. The Petrobras rigs are scheduled for delivery in 2015 and beyond; however, industry analysts believe that this timing may be delayed due to current shipyard limitations.

Market strength for ultra-deepwater and deepwater rigs varies among the geographic regions in which we operate, but generally is strong and at, or nearing, current rig capacity. As a result of successful exploration and development programs, primarily in the pre-salt regions offshore Brazil and West Africa, there continues to be a robust market for deepwater and ultra-deepwater rigs in those regions.

Market strength for mid-water floaters is stable or improving depending on the geographic market. In both the United Kingdom, or U.K., and Norway sectors of the North Sea, the mid-water market is strong, with signs of additional strengthening exhibited by increased demand and higher dayrates. A recent discovery offshore Norway has resulted in an increased interest in the harsh North Sea region. In the Mediterranean region, demand remains solid. The Southeast Asia and Australia markets also remain steady with indications of possible strengthening.

As of the date of this report, industry-wide floater utilization is reported to be approximately 90%, and, as of October 15, 2012, our floating rigs were committed for approximately 89% of the fourth quarter of 2012 and 76% of 2013.


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International Jack-up Market

Four of our marketed jack-up rigs are currently operating in the Mexican waters of the Gulf of Mexico, where drilling activity remains stable and additional tendering activity is ongoing. Of our two remaining marketed international jack-ups, one commenced a two-year bareboat charter offshore Ecuador in the third quarter of 2012. Our other marketed international jack-up rig is located offshore Montenegro and is actively seeking work.

GOM Floater and Jack-up Market

Drilling activity on the Outer Continental Shelf of the Gulf of Mexico has continued to strengthen and some industry analysts predict that drilling activity, particularly in the deepwater market, will surpass pre-Macondo levels in 2013. However, our ability to meet this demand is limited, as many of our rigs that previously operated in the U.S. Gulf of Mexico, or GOM, have been relocated to international markets and continue to work outside the GOM on long-term contracts. We currently have two semisubmersibles on contract in the GOM, and the Ocean Onyx, which is currently under construction, is expected to commence a one-year contract, plus potential option periods, beginning in the third quarter of 2013 in the GOM. We have one mid-water floater currently stacked in the GOM, and another mid-water rig that is expected to return from Brazil during the fourth quarter of 2012. In addition, we have one mid-water floater and one jack-up rig cold stacked in the GOM.

Contract Drilling Backlog

The following table reflects our contract drilling backlog as of October 17, 2012, February 1, 2012 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2011), and October 17, 2011 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011). Contract drilling backlog is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 92-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in our contract drilling backlog between periods are a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts.

                                    October 17,      February 1,      October 17,
                                        2012             2012             2011
                                                    (In thousands)
        Contract Drilling Backlog
        Floaters:
        Ultra-Deepwater (1)         $  4,660,000     $  4,926,000     $  4,363,000
        Deepwater(2)                   1,373,000        1,081,000        1,100,000
        Mid-Water(3)                   2,510,000        2,348,000        2,384,000

        Total Floaters                 8,543,000        8,355,000        7,847,000

        Jack-ups                         203,000          277,000          290,000

        Total                       $  8,746,000     $  8,632,000     $  8,137,000

(1) Contract drilling backlog as of October 17, 2012 for our ultra-deepwater floaters includes (i) $1.5 billion attributable to our contracted operations offshore Brazil for the years 2012 to 2015 and (ii) $1.8 billion attributable to future work for two of our drillships under construction for the years 2013 to 2019.

(2) Contract drilling backlog as of October 17, 2012 for our deepwater floaters includes (i) $624.0 million attributable to our contracted operations offshore Brazil for the years 2012 to 2016 and (ii) $179.0 million for the years 2013 to 2014 attributable to future work for the Ocean Onyx, which is under construction.

(3) Contract drilling backlog as of October 17, 2012 for our mid-water floaters includes $1.1 billion attributable to our contracted operations offshore Brazil for the years 2012 to 2015.


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The following table reflects the amount of our contract drilling backlog by year as of October 17, 2012.

                                                         For the Years Ending December 31,
                                        Total        2012 (1)         2013            2014         2015 - 2019
                                                                   (In thousands)
Contract Drilling Backlog
Floaters:
Ultra-Deepwater (2)                  $ 4,660,000     $ 256,000     $   871,000     $ 1,306,000     $  2,227,000
Deepwater(3)                           1,373,000       152,000         572,000         442,000          207,000
Mid-Water(4)                           2,510,000       303,000       1,090,000         864,000          253,000

Total Floaters                         8,543,000       711,000       2,533,000       2,612,000        2,687,000

Jack-ups                                 203,000        40,000         110,000          40,000           13,000

Total                                $ 8,746,000     $ 751,000     $ 2,643,000     $ 2,652,000     $  2,700,000

(1) Represents a three-month period beginning October 1, 2012.

(2) Contract drilling backlog as of October 17, 2012 for our ultra-deepwater floaters includes (i) $131.0 million, $524.0 million, $524.0 million and $324.0 million for the years 2012 to 2015, respectively, attributable to our contracted operations offshore Brazil and (ii) $29.0 million and $299.0 million for the years 2013 and 2014, respectively, and $1.5 billion in the aggregate for the years 2015 to 2019, attributable to future work for two of our drillships under construction.

(3) Contract drilling backlog as of October 17, 2012 for our deepwater floaters includes (i) $61.0 million, $222.0 million and $149.0 million for the years 2012 to 2014, respectively, and $196.0 million in the aggregate for the years 2015 to 2016, attributable to our contracted operations offshore Brazil and
(ii) $59.0 million and $120.0 million for the years 2013 and 2014, respectively, attributable to future work for the Ocean Onyx, which is under construction.

(4) Contract drilling backlog as of October 17, 2012 for our mid-water floaters includes $120.0 million, $477.0 million, $368.0 million and $86.0 million for the years 2012 to 2015, respectively, attributable to our contracted operations offshore Brazil.

The following table reflects the percentage of rig days committed by year as of October 17, 2012. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet, to total available days (number of rigs multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning dates for the Ocean BlackHawk, Ocean Onyx, Ocean BlackHornet, Ocean Apex, Ocean BlackRhino and Ocean BlackLion, which are all under construction.

                                          For the Years Ending December 31,
                               2012 (1)          2013          2014        2015 - 2019
      Rig Days Committed (2)
      Floaters:
      Ultra-Deepwater                100 %          97 %          88 %               22 %
      Deepwater                      100 %          89 %          43 %                4 %
      Mid-Water                       83 %          66 %          44 %                2 %
      All Floaters                    90 %          78 %          57 %                9 %

      Jack-ups                        71 %          55 %          26 %                1 %

(1) Represents a three-month period beginning October 1, 2012.

(2) As of October 17, 2012, includes approximately 250, 1,250 and 180 currently known, scheduled shipyard, survey and mobilization days for 2012, 2013 and 2014, respectively.

Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows

Regulatory Surveys and Planned Downtime. Our operating income is negatively impacted when we perform certain regulatory inspections, which we refer to as a 5-year survey, or special survey, that are due every five years for each of our rigs. Operating revenue decreases because these special surveys are generally performed during scheduled downtime in a shipyard. Operating expenses increase as a result of these special surveys due to the cost to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs. Repair and maintenance activities may result from the special survey or may have been previously planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.


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In addition, operating income may also be negatively impacted by intermediate surveys, which are performed at interim periods between 5-year surveys. Intermediate surveys are generally less extensive in duration and scope than a 5-year survey. Although an intermediate survey may require some downtime for the drilling rig, it normally does not require dry-docking or shipyard time, except for rigs located in the United Kingdom, or U.K., and Norwegian sectors of the North Sea.

During the last quarter of 2012, three of our rigs will require 5-year surveys. We expect these rigs to be out of service for approximately 140 days in the aggregate to complete the inspections and any shipyard projects scheduled concurrently with the surveys. We also expect to spend an additional approximately 115 days during the remainder of 2012 for the mobilization of rigs, contract acceptance testing and extended maintenance projects. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig mobilizations and other shipyard projects. See " - Overview - Contract Drilling Backlog."

Physical Damage and Marine Liability Insurance. We are self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico. If a named windstorm in the U.S. Gulf of Mexico causes significant damage to our rigs or equipment, it could have a material adverse effect on our financial position, results of operations and cash flows. Under our insurance policy that expires on May 1, 2013, we carry physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of Mexico for which our deductible for physical damage is $25.0 million per occurrence. We do not typically retain loss-of-hire insurance policies to cover our rigs.

In addition, under our insurance policy that expires on May 1, 2013, we carry marine liability insurance covering certain legal liabilities, including coverage for certain personal injury claims, with no exclusions for pollution and/or environmental risk. We believe that the policy limit for our marine liability insurance is within the range that is customary for companies of our size in the offshore drilling industry and is appropriate for our business. Our deductibles for marine liability coverage, including for personal injury claims, are $10.0 million for the first occurrence and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims which might arise during the policy year, which under the current policy commences on May 1 of each year.

Construction and Capital Upgrade Projects. We capitalize interest cost for the construction and upgrade of qualifying assets in accordance with accounting principles generally accepted in the U.S., or GAAP. The period of interest capitalization covers the duration of the activities required to make the asset ready for its intended use, and the capitalization period ends when the asset is substantially complete and ready for its intended use. During the third quarter of 2012, we commenced capitalization of interest related to the Ocean Apex upgrade project and continue to capitalize interest on qualifying expenditures related to the construction of our four new drillships and the Ocean Onyx. We expect to capitalize interest pursuant to these projects throughout 2012 and until such time, after the delivery of each rig, that activities related to making each respective vessel ready for service are no longer ongoing.

Critical Accounting Estimates

Our significant accounting policies are discussed in Note 1 of our notes to unaudited consolidated financial statements included in Item 1 of Part I of this report and in Note 1 of our notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. There were no material changes to these policies during the nine months ended September 30, 2012.


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Results of Operations

Although we perform contract drilling services with different types of drilling rigs and in many geographic locations, there is a similarity of economic characteristics among all our divisions and locations, including the nature of services provided and the type of customers for our services. We believe that the combination of our drilling rigs into one reportable segment is the appropriate aggregation in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of our results of operations, we provide greater detail with respect to the types of rigs in our fleet to enhance the reader's understanding of our financial condition, changes in financial condition and results of operations.

Key performance indicators by equipment type are listed below.

                                    Three Months Ended            Nine Months Ended
                                      September 30,                 September 30,
                                   2012           2011           2012           2011
     REVENUE EARNING DAYS (1)
     Floaters:
     Ultra-Deepwater                   549            647          1,818          1,869
     Deepwater                         437            457          1,214          1,272
     Mid-Water                       1,215          1,281          3,481          4,148
     Jack-ups                          358            524          1,298          1,793

     UTILIZATION (2)
     Floaters:
     Ultra-Deepwater                    75 %           88 %           83 %           86 %
     Deepwater                          95 %           99 %           89 %           93 %
     Mid-Water                          71 %           70 %           67 %           76 %
     Jack-ups                           56 %           44 %           49 %           51 %

     AVERAGE DAILY REVENUE (3)
     Floaters:
     Ultra-Deepwater             $ 354,100      $ 335,700      $ 357,400      $ 339,200
     Deepwater                     372,800        465,100        367,800        414,400
     Mid-Water                     258,100        268,100        262,100        269,400
     Jack-ups                       97,800         84,300         92,100         82,600

(1) A revenue earning day is defined as a 24-hour period during which a rig earns a dayrate after commencement of operations and excludes mobilization, demobilization and contract preparation days.

(2) Utilization is calculated as the ratio of total revenue-earning days divided by the total calendar days in the period for all of the specified rigs in our fleet (including cold-stacked rigs).

(3) Average daily revenue is defined as contract drilling revenue for all of the specified rigs in our fleet (excluding revenues for mobilization, demobilization and contract preparation) per revenue earning day.


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Comparative data relating to our revenues and operating expenses by equipment type are listed below.

Three and Nine Months Ended September 30, 2012 and 2011



                                               Three Months Ended               Nine Months Ended
                                                  September 30,                   September 30,
                                              2012            2011            2012             2011
                                                                  (In thousands)
CONTRACT DRILLING REVENUE
Floaters:
Ultra-Deepwater                             $ 195,574      $  220,415      $   673,233      $   652,416
Deepwater                                     163,816         217,379          452,384          542,422
Mid-Water                                     319,491         377,127          948,548        1,169,777

Total Floaters                                678,881         814,921        2,074,165        2,364,615
Jack-ups                                       35,146          46,540          121,278          155,270
Other                                              -               50               -               145

Total Contract Drilling Revenue             $ 714,027      $  861,511      $ 2,195,443      $ 2,520,030

Revenues Related to Reimbursable Expenses   $  15,114      $   16,666      $    40,528      $    54,032

CONTRACT DRILLING EXPENSE
Floaters:
Ultra-Deepwater                             $ 132,705      $  119,868      $   409,753      $   361,420
Deepwater                                      58,029          57,662          185,404          175,429
Mid-Water                                     135,935         163,957          459,227          465,750

Total Floaters                                326,669         341,487        1,054,384        1,002,599
Jack-ups                                       24,245          43,281           84,928          123,933
Other                                           6,367           6,601           20,323           15,207

Total Contract Drilling Expense             $ 357,281      $  391,369      $ 1,159,635      $ 1,141,739

Reimbursable Expenses                       $  14,563      $   16,206      $    39,351      $    52,443

OPERATING INCOME
Floaters:
Ultra-Deepwater                             $  62,869      $  100,547      $   263,480      $   290,996
Deepwater                                     105,787         159,717          266,980          366,993
Mid-Water                                     183,556         213,170          489,321          704,027

Total Floaters                                352,212         473,434        1,019,781        1,362,016
Jack-ups                                       10,901           3,259           36,350           31,337
Other                                          (6,367 )        (6,551 )        (20,323 )        (15,062 )
Reimbursable expenses, net                        551             460            1,177            1,589
Depreciation                                  (99,207 )      (101,175 )       (300,069 )       (303,523 )
General and administrative expense            (13,476 )       (14,879 )        (49,803 )        (48,976 )
Bad debt (expense) recovery                        -           (4,734 )          1,018            5,413
Gain on disposition of assets                     208             463           79,285            4,344

Total Operating Income                      $ 244,822      $  350,277      $   767,416      $ 1,037,138

Other income (expense):
Interest income                                   773           2,024            4,052            3,565
Interest expense                               (8,720 )       (15,874 )        (36,780 )        (60,144 )
Foreign currency transaction gain (loss)       (1,860 )        (1,442 )           (881 )         (4,603 )
Other, net                                       (168 )          (136 )           (767 )           (232 )

Income before income tax expense              234,847         334,849          733,040          975,724
Income tax expense                            (56,661 )       (77,995 )       (168,224 )       (201,672 )

NET INCOME                                  $ 178,186      $  256,854      $   564,816      $   774,052


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The following is a summary of the most significant transfers of our rigs during 2012 and 2011 between the geographic areas in which we operate:

Rig                          Rig Type               Relocation Details                Date
Floaters:
Ocean Monarch            Ultra-Deepwater      GOM to Vietnam                     September 2011
Ocean Monarch            Ultra-Deepwater      Vietnam to Singapore (shipyard)    August 2012
Ocean Confidence         Ultra-Deepwater      Angola to Congo                    September 2012

Ocean Epoch              Mid-Water            Cold stacked (Malaysia)            February 2011
Ocean Yorktown           Mid-Water            Brazil to GOM                      August 2011
Ocean Yorktown           Mid-Water            GOM to Mexico                      December 2011
Ocean Guardian           Mid-Water            Falkland Islands to U.K.           January 2012
Ocean Saratoga           Mid-Water            GOM to Guyana                      January 2012
Ocean Saratoga           Mid-Water            Guyana to GOM                      May 2012
Ocean Whittington        Mid-Water            Brazil to GOM                      May 2012
Ocean Patriot            Mid-Water            Australia to Vietnam               August 2012
Ocean General            Mid-Water            Malaysia to Indonesia              September 2012

Jack-ups:
Ocean Sovereign          Jack-up              Cold stacked (Malaysia)            October 2011
Ocean Scepter            Jack-up              Brazil to GOM                      October 2011
Ocean Titan              Jack-up              GOM to Mexico                      November 2011
Ocean Scepter            Jack-up              GOM to Mexico                      December 2011
Ocean Columbia           Jack-up              Sold                               March 2012
. . .
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