<PAGE> 1
FORM 6-K/A-1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer Pursuant to Rule 13a-16 or 15f-16 of the Securities
and Exchange Act of 1934
For the month of June, 1998
SANTA FE INTERNATIONAL CORPORATION
(Translation of Registrant's name into English)
Two Lincoln Centre, Suite 1100, 5420 LBJ Freeway, Dallas, Texas 75240-2648
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]
Form 20-F [X] Form 40-F [ ]
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934]
Yes [ ] No [X]
[If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with rule 12g3-2(b): 82 - ________.]
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SANTA FE INTERNATIONAL CORPORATION
TABLE OF CONTENTS TO FORM 6-K/A-1
QUARTER ENDED JUNE 30, 1998
This current report amends and restates in its entirety the current report
on Form 6-K for the month of June, 1998 as filed with the Securities and
Exchange Commission on August 7, 1998.
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Page No.
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COVER PAGE 1
DOCUMENT TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Statements of Operations and Retained
Earnings for the Six Months ended June 30, 1998 and 1997
and the Three Months ended June 30, 1998 and 1997 4
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 5
Consolidated Statements of Cash Flow for the Six Months
ended June 30, 1998 and 1997 6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about 16
Market Risk
PART II - OTHER INFORMATION 16
SIGNATURES 17
INDEX OF EXHIBITS 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants' Review Report
The Board of Directors
Santa Fe International Corporation
We have reviewed the accompanying condensed consolidated balance sheet of Santa
Fe International Corporation and subsidiaries as of June 30, 1998, and the
related condensed consolidated statements of operations for the three month and
six month periods ended June 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the six month periods ended June 30, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles in the United States.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Santa Fe International Corporation
as of December 31, 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the six months then ended not presented
herein and in our report dated January 28, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
July 28, 1998
Dallas, Texas
3
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(U.S. dollars, in thousands, except share and per share date)
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Three Months ended June 30, Six Months ended June 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- ----------------- --------------- ---------------
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Operating revenues $ 202,646 $ 164,519 $ 398,927 $ 313,772
Operating costs and expenses:
Operating costs 110,731 91,376 210,443 178,155
Depreciation and amortization 13,655 11,019 26,647 21,321
General and administrative 5,957 4,288 11,593 9,368
Gain on sale of assets (293) (210) (455) (252)
------------- -------------- ------------- ------------
Total operating costs and expenses 130,050 106,473 248,228 208,592
------------- -------------- ------------- ------------
Operating income 72,596 58,046 150,699 105,180
Other income (expense):
Investment income 1,488 1,648 2,804 3,154
Other, net (1,426) (264) (4,121) (1,090)
------------- -------------- ------------- ------------
Income before provision for taxes on income 72,658 59,430 149,382 107,244
Provision for taxes on income (Note 4) 8,678 6,095 17,643 10,986
------------- -------------- ------------- ------------
Net income 63,980 53,335 131,739 96,258
------------- -------------- ------------- ------------
Retained earnings as of the beginning of the period 350,039 111,581 286,001 68,658
Dividends declared ($0.325 per share per quarter) (3,722) - (7,443) -
============= ============== ============= ============
Retained earnings as of the end of the period $ 410,297 $ 164,916 $ 410,297 $ 164,916
============= ============== ============= ============
Income per ordinary share:
Basic and Diluted $ 0.56 $ 1.15
============= =============
Pro forma net income per ordinary share:
Basic and Diluted $ 0.47 $ 0.84
============== ============
Weighted average ordinary and ordinary equivalent
shares used in ordinary share computations:
Basic 114,500,300 114,500,000 114,500,151 114,500,000
Diluted 114,661,922 114,500,000 114,664,264 114,500,000
</TABLE>
See Independent Account's Review Report
4
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars, in thousands, except share and per share data)
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June 30, December 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 68,296 $ 68,453
Marketable securities -- 8,093
Accounts receivable 170,943 149,268
Inventories 50,521 51,182
Prepaid expenses and other current assets 18,649 17,459
----------- -----------
Total current assets 308,409 294,455
----------- -----------
Property and equipment, at cost 1,880,525 1,737,285
Less accumulated depreciation and amortization (960,555) (935,315)
----------- -----------
Property and equipment, net 919,970 801,970
Prepaid deposits -- 14,861
Other noncurrent assets 47,173 50,167
----------- -----------
Total assets $ 1,275,552 $ 1,161,453
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,942 $ 92,014
Accrued liabilities 86,325 79,741
----------- -----------
Total current liabilities 157,267 171,755
Other noncurrent liabilities 39,905 36,681
----------- -----------
Total liabilities 197,172 208,436
Commitments and contingencies (Note 3)
Shareholders' equity:
Ordinary shares par value $.01; 600,000,000 shares authorized,
114,769,680 and 114,746,550 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 1,148 1,147
Additional paid-in capital 666,935 665,869
Retained earnings 410,297 286,001
----------- -----------
Total shareholders' equity 1,078,380 953,017
----------- -----------
Total liabilities and shareholders' equity $ 1,275,552 $ 1,161,453
=========== ===========
</TABLE>
See Independent Accountants' Review Report
5
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars, in thousands)
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Six Months ended June 30,
---------------------------
1998 1997
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Cash flows from operating activities:
Net income $ 131,739 $ 96,258
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 26,647 21,321
Gain on sale of assets (455) (252)
Accretion of interest income and gains on sales (127) (1,848)
of marketable securities
Deferred income tax provision (benefit) (103) 877
Changes in operating assets and liabilities:
Accounts receivable (21,675) 2,730
Inventories 661 3,328
Prepaid expenses and other (1,190) (3,324)
Accounts payable (21,072) 4,921
Accrued liabilities 6,585 9,395
Other, net 7,991 (281)
--------- ---------
Net cash provided by operating activities 129,001 133,125
Capital expenditures (111,998) (102,059)
Advance payments for drilling rigs (18,532) --
Proceeds from sales of property and equipment 595 303
Maturities of marketable securities 8,220 24,441
Purchases of marketable securities -- (26,905)
--------- ---------
Net cash used for investing activities (121,715) (104,220)
Cash flows from financing activities:
Dividends paid (7,443) (63,064)
--------- ---------
Net cash used for financing activities (7,443) (63,064)
--------- ---------
Net change in cash and cash equivalents (157) (34,159)
Cash and cash equivalents at beginning of period 68,453 73,092
--------- ---------
Cash and cash equivalents at end of period $ 68,296 $ 38,933
========= =========
Supplemental disclosures of cash flows information:
Income taxes paid $ 13,462 $ 7,612
========= =========
</TABLE>
See Independent Accountants' Review Report
6
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SANTA FE INTERNATIONAL CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Santa Fe International Corporation (the "Company"), a Cayman Islands
corporation, is a majority-owned subsidiary of SFIC Holdings (Cayman), Inc.
("Holdings"), which in turn is a wholly-owned subsidiary of Kuwait Petroleum
Corporation ("KPC"). KPC is wholly-owned by the Government of Kuwait. In a
series of transactions during the four years ended December 31, 1996, Holdings
and its subsidiaries were reorganized in a manner which resulted in the Company
owning all of the drilling assets and the direct and indirect subsidiaries of
Holdings and KPC engaged in providing contract drilling and drilling related
services (the "Reorganization"). The actions taken in connection with the
Reorganization have been accounted for as a reorganization of entities under
common control in a manner similar to a pooling of interests.
On May 27, 1997, the Company was recapitalized, resulting in the
Company's 900,000 authorized ordinary shares, par value $1.00 per share, with
1,003 ordinary shares issued and outstanding, being recapitalized into
600,000,000 authorized ordinary shares, par value $0.01 per share ("Ordinary
Shares"), with 84,500,000 Ordinary Shares issued and outstanding. The
accompanying consolidated financial statements have been adjusted to reflect
this recapitalization retroactively.
On June 9 and 13, 1997, respectively, the Company commenced and
completed an initial public offering (the "Offering") of Ordinary Shares. Upon
the issuance of 40,000,000 Ordinary Shares in the Offering and consummation of
the purchase described below of Ordinary Shares from Holdings, the Company had
114,500,000 Ordinary Shares outstanding. Immediately following the Offering,
Holdings held 65.1% of the outstanding Ordinary Shares of the Company. The
Offering price was $28.50 per share, resulting in net proceeds of approximately
$1,088,720,000 after deducting underwriting discounts and commissions. The
Company also incurred approximately $8 million of expenses in connection with
the Offering which has been charged to additional paid-in-capital. Upon receipt
of proceeds from the sale of the first 30,000,000 Ordinary Shares sold in the
Offering, the Company paid a cash dividend to Holdings in an amount equal to
those proceeds. All of the proceeds the Company received from the sale in the
Offering of Ordinary Shares in excess of that amount were used to purchase a
like number of Ordinary Shares from Holdings.
Holders of Ordinary Shares are entitled to participate in the payment
of dividends in proportion to their holdings. Under Cayman Island law, the
Company may pay dividends or make other distributions to its shareholders, in
such amounts as the Board of Directors deems appropriate from the profits of the
Company or out of the Company's share premium account (equivalent to additional
paid-in capital) if the Company thereafter has the ability to pay its debts as
they come due. Cash dividends, if any, will be declared and paid in U.S.
dollars. At June 30, 1998 the Company had declared dividends which had not been
paid amounting to $3,722,000.
The Company operates in one business segment, providing contract
drilling and related services throughout the world.
At the direction of the Board of Directors, the Company has implemented
a change from a June 30 fiscal year end to a December 31 fiscal year end
effective January 1, 1998.
The accompanying consolidated financial statements are presented in
U.S. dollars and in accordance with U.S. generally accepted accounting
principles.
The condensed consolidated financial statements of Santa Fe
International Corporation and its consolidated subsidiaries (the "Company")
included herein have been prepared without audit, pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. Certain information
and notes normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations.
See Independent Accountants' Review Report
7
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The financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods. Such adjustments are considered to be of a normal recurring
nature unless otherwise identified. Results of operations for the three month
and six month periods ended June 30, 1998 are not necessarily indicative of the
results of operations that will be realized for the year ending December 31,
1998. These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's Transition
Report on Form 20-F for the six months ended December 31, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Per Ordinary Share
The basic and diluted income per Ordinary Share data for the three
months and six months ended June 30, 1998 is calculated based on the weighted
average shares outstanding for the periods. The pro forma income per share data
for the three months and six months ended June 30, 1997 is calculated as though
the 114,500,000 shares issued in connection with the recapitalization and the
Offering were outstanding for the periods then ended. At December 31, 1997 the
Company adopted SFAS No. 128, "Earnings Per Share". Accordingly, the financial
statements have been restated as applicable. The effect of the adoption of this
statement was not material.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income ("FAS 130"), which established standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. For the six months ended
June 30, 1998 and 1997, the Company realized no such transactions other than
those reported as net income.
Also in June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in the annual financial statements and
requires that those enterprises report selected information about products and
services, geographical areas and major customers. The Company will adopt the
provisions of FAS 131 at the end of the fiscal year ended December 31, 1998. The
adoption of FAS 131 will not have a material impact on the Company's disclosures
with respect to business segments.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various
lawsuits, claims and related matters. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
In January 1997, the Company entered into a contract for the
construction of the Galaxy II, a heavy duty harsh environment jackup drilling
rig. The cost of the rig, excluding initial mobilization, is expected to be
approximately $157 million. It is expected that the rig will be delivered from
the shipyard on time on August 20, 1998, for transport to Eastern Canada to
begin work under a five year drilling contract.
In September 1997, the Company entered into a contract for the
construction of the Galaxy III, a heavy duty harsh environment jackup drilling
rig. The cost of the rig, excluding initial mobilization, is expected to be
approximately $175 million. The rig is expected to be delivered and mobilized to
its initial work location during the fourth quarter of 1999. The Company has
entered into a three year drilling contract with a customer to operate the rig
in the U.K. sector of the North Sea.
See Independent Accountants' Review Report
8
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NOTE 4 - INCOME TAXES
The Company is not subject to income taxes in the Cayman Islands. All
of the Company's income before provision for taxes on income and the related
provision for taxes on income relates to operations in jurisdictions other than
the Cayman Islands. The relationship between income before provision for taxes
on income and the provision for taxes on income varies from period to period
because each jurisdiction in which the Company operates has its own system of
taxation (not only with respect to the nominal rate, but also with respect to
the allowability of deductions, credits and other benefits) and because the
amounts earned in, and subject to tax by, each jurisdiction changes from period
to period.
NOTE 5 - SUBSEQUENT EVENTS
On July 10, 1998, Rig 162, one of the Company's land rigs that was
operating in Saudi Arabia, was severely damaged following a blowout and
subsequent fire. There were no personnel injuries. The rig and associated
equipment were adequately insured. The final extent of the loss is currently
being evaluated, and no material impact on the financial condition or results of
operations of the Company is expected.
See Independent Accountants' Review Report
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements regarding future performance and results and the other
statements that are not historical facts contained in this report are forward-
looking statements. The words "anticipate", "expect", "project", "estimate",
"predict" and similar expressions are also intended to identify forward-
looking statements. Such statements involve risks and uncertainties including,
but not limited to, the risks involved in dealing with other parties, including
the risk that other parties' commitments to the Company and its subsidiaries
could be breached, changes in the markets for oil and natural gas and for
offshore drilling rigs and the risks of doing business in changing markets,
changes in the dates the Company's rigs undergoing conversion to drilling
operations will commence drilling, and changing costs and other factors
discussed herein and in the Company's other Securities and Exchange Commission
filings. Should one or more risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated.
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
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(in thousands)
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OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 37,310 $ 34,790 $ 70,615 $ 64,118
Semisubmersible rigs 22,756 20,864 47,283 38,304
300-350 foot cantilever jackup rigs 32,803 29,024 70,702 54,987
200-250 foot jackup rigs 42,028 28,357 81,361 54,490
Other marine rigs 2,759 3,101 6,686 5,370
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Total marine rigs 137,656 116,136 276,647 217,269
Land rigs 36,909 28,230 74,919 53,901
Drilling related services 27,626 19,759 46,601 41,876
Other 455 394 760 726
--------- --------- --------- ---------
Total operating revenues 202,646 164,519 398,927 313,772
--------- --------- --------- ---------
OPERATING COSTS (1)
Heavy duty harsh environment jackup rigs 12,843 11,773 23,322 21,867
Semisubmersible rigs 21,957 9,862 34,162 18,927
300-350 foot cantilever jackup rigs 13,604 15,944 27,677 29,520
200-250 foot jackup rigs 16,552 16,154 31,817 28,370
Other marine rigs 1,952 2,306 4,989 3,657
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Total marine rigs 66,908 56,039 121,967 102,341
Land rigs 23,628 20,202 48,688 38,202
Drilling related services 18,582 13,954 35,850 31,103
Other 1,613 1,181 3,938 6,509
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Total operating costs 110,731 91,376 210,443 178,155
--------- --------- --------- ---------
Depreciation and amortization 13,655 11,019 26,647 21,321
General and administrative 5,957 4,288 11,593 9,368
Loss (gain) on sale of assets (293) (210) (455) (252)
========= ========= ========= =========
OPERATING INCOME $ 72,596 $ 58,046 $ 150,699 $ 105,180
========= ========= ========= =========
OPERATING INCOME AS A PERCENTAGE OF REVENUES 35.8% 35.3% 37.8% 33.5%
========= ========= ========= =========
</TABLE>
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(1) EXCLUSIVE OF DEPRECIATION WHICH IS PRESENTED SEPARATELY BELOW.
10
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AVERAGE FOR THE THREE MONTHS AVERAGE FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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1998 1997 1998 1997
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RIG FLEET UTILIZATION
Heavy duty harsh environment jackup rigs 100.0% 100.0% 96.5% 98.9%
Semisubmersible rigs 77.7% 100.0% 88.8% 100.0%
300-350 foot cantilever jackup rigs 83.7% 100.0% 90.5% 97.3%
200-250 foot jackup rigs 98.8% 100.0% 99.4% 98.5%
Other marine rigs 100.0% 100.0% 100.0% 100.0%
Total marine rigs 92.0% 100.0% 95.0% 98.5%
Land rigs 88.5% 89.6% 90.1% 89.1%
AVERAGE DAYRATES
Heavy duty harsh environment jackup rigs $ 102,500 $ 95,577 $ 101,023 $ 89,550
Semisubmersible rigs 107,340 76,425 98,098 70,541
300-350 foot cantilever jackup rigs 53,864 39,868 53,971 39,026
200-250 foot jackup rigs 51,951 34,624 50,254 33,649
Other marine rigs 15,159 17,038 18,470 15,003
Total marine rigs 63,261 49,085 61,862 46,785
Land rigs 15,800 14,087 16,043 13,754
</TABLE>
QUARTERS ENDED JUNE 30, 1998 AND 1997
OPERATING REVENUES. Total operating revenues increased $38.1 million
(23.2%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet, which operated entirely in the North Sea for both quarterly periods,
increased $2.5 million (7.2%) because of a 7.2% increase in average dayrates.
Operating revenues for the Company's three semisubmersibles increased $1.9
million (9.1%) primarily due to a 40.5% increase in average dayrates ($4.6
million), partially offset by 61 days lower utilization of Rig 140 ($2.7
million) as it was relocated to the North Sea from the Gulf of Mexico. The rig
underwent a planned shipyard maintenance and capital upgrade program, which has
been completed, and the rig returned to work under a new contract beginning in
early August. Revenues from 300-350 foot cantilever jackups increased $3.8
million (13.0%) primarily because of a 35.1% increase in average dayrates ($9.6
million), partially offset by lower utilization ($5.8 million), mainly for the
Parameswara and Compact Driller as they were mobilized from Australia and Gabon
to Malaysia and Thailand, respectively. Revenues from 200-250 foot jackup rigs
increased $13.7 million (48.2%), mainly due to a 50.0% increase in average
dayrates. Revenues from land rigs increased by $8.7 million (30.7%). Three new
rigs, two in the Middle East and one in North Africa, operated in the quarter
ended June 30, 1998 as compared with the same period of 1997, increasing
revenues by $4.9 million. The remaining increase of $3.8 million was primarily
due to a 12.2% increase in dayrates earned by all other land rigs in the fleet
($2.1 million) and increased utilization, mainly in the Middle East ($1.7
million). Revenues from drilling related services increased $7.9 million (39.8%)
primarily because of a $10.2 million increase in revenues from incentive
contracts, partially offset by a $2.3 million decrease in third party rig
operations revenues. Incentive drilling revenues increased because of an
increase in the number of contracts containing incentive based provisions,
primarily in the North Sea and North Africa. Third party operations revenues
decreased mainly due to implementation of a joint venture company operating a
third party semisubmersible in Azerbaijan. The rig was previously operated
solely by the Company during the quarter ended June 30, 1997. The balance of the
increase was attributable to the inception of transportation operations in
Kuwait.
OPERATING COSTS. Total operating costs increased $19.4 million (21.2%).
Semisubmersible rig operating costs increased $12.1 million (122.6%) primarily
due to the relocation of Rig 140 from the Gulf of Mexico and its planned
shipyard maintenance and capital upgrade project, partially offset by reduced
utilization. Operating costs on 300-350 foot cantilever jackup rigs decreased
$2.3 million (14.7%) primarily due to lower utilization. Operating costs
associated with land rigs increased $3.4 million (17.0%), primarily due to the
deployment of two new rigs in the Middle East and one new rig in North Africa
($2.8 million).
11
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Operating costs from drilling related services increased $4.6 million (33.2%)
primarily because of a $5.1 million increase in costs from incentive contracts,
mainly due to an increase in the number of contracts containing incentive based
provisions in the North Sea.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $1.7 million (38.9%) primarily due to an increase in staff levels
($0.2 million), increased costs ($0.5 million) associated with becoming a public
company in June 1997 and increased employee benefit plan costs ($0.9 million).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $2.6 million (23.9%) for the quarter ended June 30, 1998 as compared
with the same period in the prior year. Depreciation of three land rigs placed
in service during the quarter ended June 30, 1998 yielded increased expense of
$0.7 million, with the remainder of the increase due to depreciation of capital
additions to all other rigs and equipment.
OTHER INCOME (EXPENSE), NET. This category experienced a $1.3 million
decrease for the quarter ended June 30, 1998, mainly due to decreased foreign
exchange gains of $1.1 million for the quarter, primarily resulting from
unfavorable movements of the dollar in relation to the rupiah and the pound
sterling. Investment income decreased by $0.2 million, primarily due to lower
invested balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
increased by $2.6 million, primarily due to increased earnings in the Middle
East, North Africa, U.K. and West Africa, leading to an increase in the
Company's effective tax rate to 11.9% from 10.3% for the same period in 1997.
NET INCOME. Net income for the quarter ended June 30, 1998 increased
$10.7 million (20.0%) to $64.0 million as compared to $53.3 million for the same
period in the prior year. This increase resulted primarily from the increase of
$38.1 million in the Company's operating revenues, partially offset by increased
operating expense of $19.4 million, increased general and administrative expense
of $1.7 million, $2.6 million higher depreciation expense, lower other income
(expense), net of $1.3 million and an increased provision for income taxes of
$2.6 million.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OPERATING REVENUES. Total operating revenues increased $85.2 million
(27.1%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet, which operated entirely in the North Sea for both periods, increased $6.5
million (10.1%) principally because of a 12.8% increase in average dayrates
($8.3 million) and 8 days increased utilization for the Galaxy I ($0.8 million),
partially offset by 25 days idle time for the Magellan while completing
certification inspections and preparing for a new contract ($2.6 million).
Operating revenues for the Company's three semisubmersibles increased $9.0
million (23.4%), mainly due to a 39.1% increase in average dayrates, partially
offset by lower utilization of Rig 140 ($2.6 million) as it was relocated from
the Gulf of Mexico to the North Sea for a new contract beginning in early
August. The rig underwent a planned shipyard maintenance and capital upgrade
program prior to commencement of its new contract. Revenues from 300-350 foot
cantilever jackups increased $15.7 million (28.6%) primarily because of a 38.3%
increase in average dayrates ($20.6 million), partially offset by lower
utilization ($4.9 million), mainly for the Parameswara and Compact Driller as
they were mobilized from Australia and Gabon to Malaysia and Thailand,
respectively. Revenues from 200-250 foot jackup rigs increased $27.4 million
(50.6%), mainly due to a 49.3% increase in average dayrates. Operating revenues
for other marine rigs increased $1.3 million (23.1%) primarily due to higher
average dayrates for the lake barge working in South America. Revenues from land
rigs increased by $21.0 million (39.0%). Five new rigs, four in the Middle East
and one in North Africa, operated in the six months ended June 30, 1998 as
compared with the same period of 1997, increasing revenues by $15.6 million. The
remaining increase of $5.4 million was primarily due to an 11.2% increase in
average dayrates earned. Revenues from drilling related services increased $4.3
million (10.2%) primarily because of a $9.6 million increase in revenues from
incentive contracts, partially offset by a $5.3 million decrease in third party
rig operations revenues. Incentive drilling revenues increased because of an
increase in the number of contracts containing incentive based provisions,
primarily in the North Sea. Third party operations revenues decreased mainly due
to implementation of a joint venture company that operated a third party
semisubmersible in the Caspian Sea. The rig was previously operated solely by
the Company during the six months ended June 30, 1997. Decreased well
engineering services in the North Sea were partially offset by increased
activity in the Middle East and South America.
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OPERATING COSTS. Total operating costs increased $32.3 million (18.1%).
Semisubmersible rig operating costs increased $15.2 million (80.5%) primarily
due to relocation of Rig 140 from the Gulf of Mexico and costs associated with a
planned shipyard maintenance and capital upgrade program prior to commencing new
work in the North Sea. Operating costs from 200-250 foot jackup rigs increased
$3.6 million (12.7%), mainly due to increased costs associated with a new
contract for the Key Victoria in South America, which included increased labor
and support costs stemming from a new collective bargaining agreement that was
in effect for the six months ended June 30, 1998. Increased operating costs of
$1.2 million (31.6%) for other marine rigs stemmed mainly from increased labor
costs for the lake barge working in South America. Operating costs associated
with land rigs increased $10.5 million (27.4%) primarily due to the deployment
of four additional rigs in the Middle East and one in North Africa ($8.4
million) and other increased operating costs, mainly in South America. Operating
costs from drilling related services increased $4.7 million (15.3%). Incentive
drilling expense increased $5.9 million, mainly due to an increase in the number
of contracts containing incentive based provisions in the North Sea. Third party
rig operations expenses decreased $1.2 million mainly due to the implementation
of a joint venture company that operated a third party semisubmersible in the
Caspian Sea, partially offset by increased activity in the Middle East and South
America. The $2.6 million (39.5%) decrease in other operating costs was
primarily due to reduced provision for inventory obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $2.2 million (23.8%) primarily due to an increase in staff levels
($0.4 million), increased costs ($0.7 million) associated with becoming a public
company in June 1997 and increased employee benefit plan costs ($0.9 million).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $5.3 million (25.0%) for the six months ended June 30, 1998 as
compared with the same period in the prior year. Depreciation of five new land
rigs placed in service during 1998 yielded increased expense of $2.4 million,
with the remainder of the increase due to depreciation of capital additions to
all other rigs and equipment.
OTHER INCOME (EXPENSE), NET. This category experienced a $3.4 million
decrease for the six months ended June 30, 1998. Foreign exchange gains
decreased $2.1 million for the quarter, primarily resulting from unfavorable
movements of the dollar in relation to the rupiah and the pound sterling, while
other non-operating expenses increased $1.0 million mainly due to increased
accruals for contingency reserves. Investment income decreased by $0.3 million,
primarily due to lower invested balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
increased by $6.7 million (60.6%), primarily due to increased earnings in the
Middle East, North Africa, U.K. and West Africa, leading to an increase in the
Company's effective tax rate to 11.8% from 10.2% for the same period in 1997.
NET INCOME. Net income for the six months ended June 30, 1998 increased
$35.5 million (36.9%) to $131.7 million as compared to $96.2 million for the
same period in the prior year. This increase resulted primarily from the
increase of $85.2 million in the Company's operating revenues, partially offset
by increased operating expense of $32.3 million, increased general and
administrative expense of $2.2 million, $5.3 million higher depreciation
expense, lower other income (expense), net of $3.4 million and an increased
provision for income taxes of $6.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $129.0 million and $133.1
million for the six months ended June 30, 1998 and 1997, respectively. The
decrease in cash flows from operations was primarily attributable to changes in
cash used for working capital. Investing activities used cash of $121.7 million
and $104.2 million for the six month periods ended June 30, 1998 and 1997,
respectively. The increased usage in investing activities of $17.5 million for
the six month periods was primarily due to $10.0 million increased capital
spending and $18.5 million in increased advance payments related to construction
of drilling rigs, partially offset by $10.7 million in decreased purchases and
maturities of marketable securities. Capital expenditures totaled $112.0 million
and $102.1 million for the six months ended June 30, 1998 and 1997,
respectively, principally related to rig expansion, upgrades and modernization.
For the six month periods, capital expenditures on the heavy duty harsh
environment jackup rig Galaxy III and new land rigs increased $39.3 million and
$5.4 million, respectively, while spending on the Galaxy II decreased $12.1
million. Cash used in financing activities was $7.4 million for the six months
ended June 30, 1998, consisting solely of
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dividends paid, and $63.1 million for the six months ended June 30, 1997, which
was made up of cash distributions to Holdings pursuant to the initial public
offering of Ordinary Shares.
The Company expects to spend approximately $294 million, a reduction of
$90 million from previous indications, during the year ending December 31, 1998.
Capital spending to meet contractual obligations for customers and for rig
upgrade, modernization and enhancement projects is estimated to require
approximately $64 million and represent numerous individual transactions over
the course of the year. Capital expenditures on the two new heavy duty harsh
environment jackup rigs presently under construction are estimated to require
approximately $180 million. The Company believes it has minimal exposure to
significant cost increases in constructing either rig as the construction
contracts with the shipyard are fixed price arrangements. Further, the Company
has to date been, and expects through the completion of these construction
projects to be, successful in purchasing the Company provided drilling equipment
at price and delivery terms within the Company's initial project estimates. The
Company currently has four high specification land rigs under construction for
use in South America. Current estimates indicate approximately $50 million will
be needed to complete these rigs for initial work beginning during the third and
fourth quarters of 1998. The Company had identified $40 million and $50 million,
respectively, that had been intended for use in constructing a high
specification heavy duty jackup rig and the acquisition of two additional 3,000
horsepower land rigs. It is more likely than not that this discretionary
spending will be postponed. It is expected that the entire 1998 capital program
will be funded from internally generated funds. Future capital spending,
particularly rig additions, is subject to the Company's prospects for securing
appropriate drilling contract opportunities and the availability of suitable
rigs, rig components, construction facilities and supplies.
From time to time, the Company reviews opportunities for rig
acquisition, construction or upgrade. Once a capital project is undertaken by
the Company, factors outside the Company's control, such as changes in market
demand, may alter the project economics and the Company may be unable to fully
recoup the cost of such expenditures through future drilling contracts. Should
current plans for rig acquisition, construction or upgrade not be completed, the
Company will not have those rigs available to compete in its markets.
On June 9, 1998, the Company's Board of Directors declared a quarterly
dividend of $0.0325 per Ordinary Share payable on July 15, 1998 to holders of
record at the close of business June 30, 1998. The Company's current dividend
policy contemplates payment of future quarterly dividends of $0.0325 per
Ordinary Share.
The Company's principal source of funds has been cash flow from
operations. The Company believes available cash resources and cash flows from
operations will be sufficient to meet its capital requirements during 1998.
CURRENCY RISK AND INFLATION
The Company conducts material business operations in foreign currency
environments, including the U.K., Venezuela, Indonesia and Egypt. The Company
generally attempts to minimize its currency exchange risk by seeking
international contracts payable in local currency in amounts equal to the
Company's estimated operating costs payable in local currency and in dollars for
the balance of the contract. Because of this strategy, the Company has minimized
its net asset or liability positions denominated in local currencies and has not
experienced significant gains or losses associated with changes in currency
exchange rates. Accordingly, the Company has not historically entered into
financial hedging arrangements to manage risks relating to fluctuations in
currency exchange rates. However, the Company may enter into such contracts in
the future in the event that the Company assumes significant foreign currency
risks.
Although inflation has not had a significant impact on the Company's
results of operations during the past several years, the Company has recently
experienced significant increases in the cost of labor and rig related equipment
and spare parts. The Company's financial results could be negatively affected in
the future by these or similar cost increases.
CREDIT RISKS
The Company's customers consist primarily of major international, state
owned and large independent oil companies and their affiliates. The Company has
not incurred any charges for credit losses
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during the last five years. There is no assurance that in the future such
charges will not occur. Such charges may adversely affect the Company's
profitability.
MARKET CONDITIONS
The Company has observed that the price of oil has declined and remains
soft, which has led to certain of its customers reducing their offshore and land
drilling activity. This reduced activity has led to generally lower rig
utilization across the industry, particularly in the Gulf of Mexico. While the
Company does not have a presence in the Gulf of Mexico, it is expected that
lower rig utilization will lead to increased competitive pressure within the
drilling industry which could result in reduced dayrates or lower rig
utilization in future periods. Such developments could negatively impact the
Company's future financial results.
IMPACT OF YEAR 2000
The Company is addressing the potential impact of the Year 2000 issue
upon its operations. Various evaluations have been underway in the Company's
field operations to identify risk areas in all locations. Evaluation of vendors
and suppliers of equipment and materials has been initiated to determine whether
they are taking necessary action to ensure that materials and equipment
purchased by the Company are Year 2000 compliant. The Company is near
finalization of its inventory of such potential risks. At this time, the Company
cannot determine whether the results of the in-progress reviews will identify
significant matters to be addressed before they have an impact on its
operations, which may be material. Accordingly, the Company cannot assess at
this time whether future actions are required, the extent to which any such
requirements can be timely implemented and whether they will have a material
impact on future operations.
Assessments of all significant accounting and business systems have
been completed and appropriate action identified. Specific remedial plans have
been established, and, in most cases, action has been initiated with respect to
these systems. It is believed that the remedial action will be completed in
advance of Year 2000 and the cost of remedial action required in this area will
not have a material impact on the financial condition or results of operations
of the Company.
OTHER
Operational risks and hazards may result in extensive damage to or
total loss of drilling rigs, with associated personal injuries and loss of life,
pollution, well loss, well control expenses and/or wreck removal or other
requirements. Such losses, liabilities or obligations may be uninsured or
underinsured. In the event of a major incident or incidents resulting from
operational risks and hazards, the Company will sustain a loss of revenue by
reason of the rig loss or damage and may be subject to extraordinary expenses in
respect of uninsured or underinsured losses, liabilities or obligations.
On July 10, 1998, Rig 162, one of the Company's land rigs that was
operating in Saudi Arabia, was severely damaged following a blowout and
subsequent fire. There were no personnel injuries. The rig and associated
equipment were adequately insured. The final extent of the loss is currently
being evaluated, and no material impact on the financial condition or results of
operations of the Company is expected. The Company is currently evaluating
whether the rig will be replaced.
The Company's worldwide operations are subject to numerous
international, U.S., state and local environmental laws and regulations that
relate directly or indirectly to its operations, including certain regulations
controlling the discharge of materials into the environment, requiring removal
and clean-up under certain circumstances, or otherwise relating to the
protection of the environment. Laws and regulations protecting the environment
have become increasingly stringent in recent years and may in certain
circumstances impose a strict liability and render a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Such laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company that were
in compliance with all applicable laws at the time such acts were performed.
The Company's liquidity also may be adversely impacted by reason of
war, political turmoil, revolution, insurrection or similar events which could,
inter alia, result in damage to or loss of the Company's rigs, either physically
or by reason of nationalization, expropriation or deprivation of use, or could
impair the concessionary rights of the Company's customers, thus jeopardizing
the Company's drilling contracts. The
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Company does not normally insure against these risks, and such events could
result in an actual or constructive loss of substantial assets and the
associated loss of revenues and/or receivables.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
15.1 Acknowledgement of Independent Public Accountants
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 31, 1998 SANTA FE INTERNATIONAL CORPORATION
By /s/ D. G. Barber
------------------------------------
D. G. Barber, Senior Vice President
and Chief Financial Officer
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INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
15.1 Acknowledgement of Independent Public Accountants
</TABLE>
<PAGE> 1
EXHIBIT 15.1
August 31, 1998
The Board of Directors
Santa Fe International Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 333-7070) of Santa Fe International Corporation of our report
dated July 28, 1998, relating to the unaudited condensed consolidated interim
financial statements of Santa Fe International Corporation included in its Form
6-K/A-1 for the quarter ended June 30, 1998.
ERNST & YOUNG LLP
Dallas, Texas
