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FORM 6-K
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 September, 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 AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO FORM 6-K
QUARTER ENDED SEPTEMBER 30, 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
Consolidated Statements of Operations and Retained Earnings
for the Nine Months ended September 30, 1998 and 1997 and the
Three Months ended September 30, 1998 and 1997
3
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997
4
Consolidated Statements of Cash Flow for the Nine Months ended September 30,
1998 and 1997 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION 16
SIGNATURES 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 data)
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Three Months ended September 30, Nine Months ended September 30,
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1998 1997 1998 1997
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Operating revenues $ 201,085 $ 176,787 $ 600,012 $ 490,559
Operating costs and expenses:
Operating costs 101,068 92,196 311,511 270,351
Depreciation and amortization 13,267 12,144 39,914 33,465
General and administrative 5,426 5,234 17,019 14,602
Loss (gain) on sale of assets (241) 155 (696) (97)
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Total operating costs and expenses 119,520 109,729 367,748 318,321
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Operating income 81,565 67,058 232,264 172,238
Other income (expense):
Investment income 1,188 618 3,992 3,772
Other, net 161 (1,022) (3,960) (2,112)
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Income before provision for taxes on income 82,914 66,654 232,296 173,898
Provision for taxes on income (Note 4) 10,180 7,332 27,823 18,318
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Net income 72,734 59,322 204,473 155,580
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Retained earnings as of the beginning of the period 410,297 164,916 286,001 68,658
Dividends declared ($0.0325 per share per quarter) (3,721) (3,721) (11,164) (3,721)
-------------- -------------- -------------- --------------
Retained earnings as of the end of the period $ 479,310 $ 220,517 $ 479,310 $ 220,517
============== ============== ============== ==============
Income per ordinary share:
Basic and Diluted $ 0.64 $ 0.52 $ 1.79 $ 1.36
============== ============== ============== ==============
Weighted average ordinary and ordinary equivalent
shares used in income per ordinary share computations:
Basic 114,500,330 114,500,000 114,500,221 114,500,000
Diluted 114,511,029 114,500,000 114,615,203 114,500,000
</TABLE>
See Notes to the Consolidated Financial Statements.
3
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SANTA FE INTERNATIONAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars, in thousands, except share data)
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September 30, December 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 95,036 $ 68,453
Marketable securities -- 8,093
Accounts receivable 159,518 149,268
Inventories 54,183 51,182
Prepaid expenses and other current assets 22,401 17,459
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Total current assets 331,138 294,455
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Property and equipment, at cost 1,957,689 1,737,285
Less accumulated depreciation and amortization (966,553) (935,315)
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Property and equipment, net 991,136 801,970
Prepaid deposits -- 14,861
Other noncurrent assets 48,513 50,167
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Total assets $ 1,370,787 $ 1,161,453
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82,720 $ 92,014
Accrued liabilities 100,526 79,741
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Total current liabilities 183,246 171,755
Other noncurrent liabilities 39,691 36,681
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Total liabilities 222,937 208,436
Commitments and contingencies (Note 3)
Shareholders' equity:
Ordinary shares par value $.01; 600,000,000 shares authorized,
114,765,680 and 114,746,550 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 1,148 1,147
Additional paid-in capital 667,392 665,869
Retained earnings 479,310 286,001
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Total shareholders' equity 1,147,850 953,017
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Total liabilities and shareholders' equity $ 1,370,787 $ 1,161,453
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</TABLE>
See Notes to the Consolidated Financial Statements.
4
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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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Nine Months ended September 30,
--------------------------------
1998 1997
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Cash flows from operating activities:
Net income $ 204,473 $ 155,580
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 39,914 33,465
Gain on sale of assets (696) (97)
Accretion of interest income and gains on sales (127) (2,194)
of marketable securities
Deferred income tax provision (benefit) (76) 976
Changes in operating assets and liabilities:
Accounts receivable (2,934) (515)
Inventories (3,001) (1,561)
Prepaid expenses and other (4,942) (11,160)
Accounts payable (9,294) (2,658)
Accrued liabilities 15,035 16,990
Other, net 7,054 (3,845)
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Net cash provided by operating activities 245,406 184,981
Capital expenditures (204,713) (140,201)
Advance payments for drilling rigs (18,532) (23,116)
Proceeds from sales of property and equipment 851 438
Maturities of marketable securities 8,220 50,348
Purchases of marketable securities -- (49,791)
Proceeds from insurance settlement 6,515 --
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Net cash used for investing activities (207,659) (162,322)
Cash flows from financing activities:
Dividends and distributions paid (11,164) (63,064)
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Net cash used for financing activities (11,164) (63,064)
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Net change in cash and cash equivalents 26,583 (40,405)
Cash and cash equivalents at beginning of period 68,453 73,092
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Cash and cash equivalents at end of period $ 95,036 $ 32,687
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Supplemental disclosures of cash flows information:
Income taxes paid $ 19,634 $ 10,381
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</TABLE>
See Notes to the Consolidated Financial Statements
5
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SANTA FE INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1998 the Company had declared dividends which
had not been paid amounting to $3,721,000.
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.
6
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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 nine month periods ended September 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 nine months ended September 30, 1998 and 1997, respectively, is
calculated based on the weighted average shares outstanding for the periods. 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, 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 nine months ended
September 30, 1998 and 1997, the Company realized no such transactions other
than those reported as net income.
Also in June 1997, the FASB issued SFAS 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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS 132"). FAS 132 revises
employers' disclosures about pension and other postretirement benefit plans
through the standardization of disclosure requirements for pension and other
postretirement benefits and suggests combined formats for presentation of
pension and other post retirement benefit disclosures. Additional information
is required for changes in benefit obligations and fair values of plan assets,
and certain formerly required disclosures are eliminated. The Company will
adopt the provisions of FAS 132 at the end of the fiscal year ended December
31, 1998. The adoption of FAS 132 is not expected to have a material impact on
the Company's disclosures with respect to pension and other postretirement
benefits.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") which established accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
FAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt the provisions of FAS 133 at
the end of the fiscal year ended December 31, 1999. The adoption of FAS 133 is
not expected to have a material impact on the Company's statement of financial
position.
7
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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 rig was delivered timely from the shipyard on August 24, 1998, at a
total cost of approximately $158 million excluding initial mobilization. The
Galaxy II was transported from Singapore to Nova Scotia during the period
August 26 to October 27 and, following completion of import formalities, was
moved to its first drilling location where final commissioning activity will be
completed. The rig began work under a five year drilling contract on November
9, 1998.
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 by the end of the third 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.
On July 10, 1998, Rig 162, one of the Company's land rigs operating in
Saudi Arabia, was severely damaged following a blowout and subsequent fire.
There were no personnel injuries. As provided for in the drilling contract, the
customer elected to cancel the remaining term of the contract and the Company
determined that the rig would not be rebuilt. An unrepaired partial loss
settlement has been negotiated with the Company's insurance carriers under
which total proceeds of $13.8 million will be received. Of these total
proceeds, $6.5 million had been received at September 30, 1998. It is expected
that the remainder of all proceeds will be received by December 31, 1998.
Negotiations are continuing with the Company's customer regarding equipment to
be salvaged and exported from the country; therefore, the final extent of the
equipment loss continues to be evaluated. The final disposition of this claim
is not expected to have a material impact on the financial condition or results
of operations of the Company.
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 varies from period
to period.
8
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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. Statements made in this document that state the
Company's or management's intentions, hopes, plans, estimates, beliefs,
expectations, anticipations or predictions of the future and words of similar
import are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
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(in thousands)
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OPERATING REVENUES
Heavy duty harsh environment jackup rigs $ 38,027 $ 36,201 $ 108,643 $ 100,319
Semisubmersible rigs 29,561 21,800 76,844 60,104
300-350 foot cantilever jackup rigs 40,843 29,883 111,545 84,870
200-250 foot jackup rigs 33,955 32,903 115,316 86,910
Other marine rigs 3,238 3,319 9,924 8,750
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Total marine rigs 145,624 124,106 422,272 340,953
Land rigs 35,127 34,512 110,046 88,413
Drilling related services 20,101 17,732 66,702 60,030
Other 233 437 992 1,163
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Total operating revenues 201,085 176,787 600,012 490,559
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OPERATING COSTS (1)
Heavy duty harsh environment jackup rigs 12,951 12,454 36,272 34,321
Semisubmersible rigs 17,789 10,437 51,951 29,364
300-350 foot cantilever jackup rigs 13,945 14,259 41,622 43,778
200-250 foot jackup rigs 17,593 15,226 49,409 43,462
Other marine rigs 2,086 2,075 7,075 5,866
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Total marine rigs 64,364 54,451 186,329 156,791
Land rigs 23,592 22,004 72,280 60,206
Drilling related services 13,025 12,573 48,875 43,677
Other 87 3,168 4,027 9,677
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Total operating costs 101,068 92,196 311,511 270,351
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Depreciation and amortization 13,267 12,144 39,914 33,465
General and administrative 5,426 5,234 17,019 14,602
Loss (gain) on sale of assets (241) 155 (696) (97)
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OPERATING INCOME $ 81,565 $ 67,058 $ 232,264 $ 172,238
============== ============== ============== ==============
OPERATING INCOME AS A PERCENTAGE OF REVENUES 40.6% 37.9% 38.7% 35.1%
============== ============== ============== ==============
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(1) Exclusive of depreciation which is presented separetely below.
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AVERAGE FOR THE THREE MONTHS AVERAGE FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 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% 97.7% 99.3%
Semisubmersible rigs 86.6% 88.8% 88.0% 96.2%
300-350 foot cantilever jackup rigs 97.6% 100.0% 92.9% 98.2%
200-250 foot jackup rigs 86.2% 100.0% 95.0% 99.0%
Other marine rigs 100.0% 100.0% 100.0% 100.0%
Total marine rigs 92.9% 98.7% 94.3% 98.6%
Land rigs 89.5% 92.1% 89.9% 90.2%
AVERAGE DAYRATES
Heavy duty harsh environment jackup rigs $ 103,334 $ 98,372 $ 101,821 $ 92,545
Semisubmersible rigs 123,686 88,980 106,580 76,274
300-350 foot cantilever jackup rigs 56,884 40,602 55,002 39,566
200-250 foot jackup rigs 47,556 39,738 49,428 35,721
Other marine rigs 17,598 18,038 18,176 16,026
Total marine rigs 65,508 52,565 63,073 48,735
Land rigs 14,828 15,064 15,634 14,237
</TABLE>
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
OPERATING REVENUES. Total operating revenues increased $24.3 million
(13.7%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet, which operated entirely in the North Sea for both periods, increased
$1.8 million (5.0%) because of a 5.0% increase in average dayrates. Operating
revenues for the Company's three semisubmersibles increased $7.8 million
(35.6%) primarily due to a 39.0% increase in average dayrates ($7.1 million)
and 31 days higher utilization of Rig 135 in the North Sea ($3.3 million),
partially offset by 37 days lower utilization of Rig 140 ($2.7 million) as it
was relocated to the North Sea from the Gulf of Mexico. Following relocation,
Rig 140 underwent a planned shipyard maintenance and capital upgrade program.
The rig returned to work under a new contract beginning in early August.
Revenues from 300-350 foot cantilever jackups increased $11.0 million (36.7%)
primarily because of a 40.1% increase in average dayrates ($11.7 million),
partially offset by eighteen days lower utilization ($0.7 million), mainly for
the Compact Driller as it was mobilized from Gabon to Thailand. Revenues from
200-250 foot jackup rigs increased $1.1 million (3.2%), mainly due to a 19.7%
increase in average dayrates ($5.4 million), partially offset by lower
utilization ($4.3 million) of Rig 134 in Indonesia (92 days) and the Key
Victoria in Venezuela (22 days). Revenues from drilling related services
increased $2.4 million (13.4%) due to a $1.1 million increase in revenues from
incentive contracts and a $1.3 million increase 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
Venezuela. Third party operations revenues increased mainly due to the
inception of transportation operations in Kuwait and compensated clean-up
activities at the site of the Rig 162 blowout in Saudi Arabia, partially
offset by fewer well services labor jobs in Venezuela.
OPERATING COSTS. Total operating costs increased $8.9 million (9.6%).
Semisubmersible rig operating costs increased $7.4 million (70.4%) primarily
due to expensing all costs associated with the relocation of Rig 140 from the
Gulf of Mexico and its planned shipyard maintenance project, partially offset
by reduced utilization. Operating costs for the 200-250 foot jackup rigs
increased $2.4 million (15.5%) primarily due to increased repairs and
maintenance costs on Rig 127 in Qatar and the Key Bermuda in Nigeria. Operating
costs associated with land rigs increased $1.6 million (7.2%), primarily due to
the deployment of two new rigs in Venezuela and one in Egypt.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased slightly ($0.2 million, or 3.7%) primarily due to increased costs
associated with employee benefits.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.1 million (9.2%) for the quarter ended September 30, 1998 as
compared with the same period in the prior year. Depreciation of three land
rigs that were in service during the quarter ended September 30, 1998, but not
in the prior year same period, yielded increased expense of $0.3 million, while
depreciation of transportation equipment in Kuwait, acquired in the first
quarter of 1998, increased expense $0.4 million. The remainder of the increase
was due to depreciation of general capital additions to all other rigs and
equipment.
OTHER INCOME (EXPENSE), NET. This category experienced a $1.8 million
increase for the quarter ended September 30, 1998, mainly due to increased
foreign exchange gains of $1.4 million for the quarter, primarily resulting
from favorable movements of the dollar in relation to the pound sterling.
Investment income increased by $0.6 million, primarily due to higher invested
balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
increased by $2.8 million (38.8%), primarily due to increased earnings in North
Africa, Southeast Asia, the U.K. and West Africa, leading to an increase in the
Company's effective tax rate to 12.3% from 11.0% for the same period in 1997.
NET INCOME. Net income for the quarter ended September 30, 1998
increased $13.4 million (22.6%) to $72.7 million as compared to $59.3 million
for the same period in the prior year. This increase resulted primarily from
the increase of $24.3 million in the Company's operating revenues and increased
other income (expense), net of $1.8 million, partially offset by increased
operating expense of $8.9 million, increased general and administrative expense
of $0.2 million, $1.1 million higher depreciation expense and an increased
provision for income taxes of $2.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OPERATING REVENUES. Total operating revenues increased $109.5 million
(22.3%). Revenues from the Company's heavy duty harsh environment jackup rig
fleet, which operated entirely in the North Sea for both periods, increased
$8.3 million (8.3%) principally because of a 10.0% increase in average dayrates
($10.3 million) and eight 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 ($2.8
million). Operating revenues for the Company's three semisubmersibles increased
$16.7 million (27.9%), mainly due to a 39.7% increase in average dayrates
($19.1 million) and higher utilization of Rig 135 in the North Sea ($2.8
million), partially offset by lower utilization of Rig 140 ($5.2 million) as it
was relocated from the Gulf of Mexico to the North Sea to undergo a planned
shipyard maintenance and capital upgrade program prior to the commencement of a
new contract. Revenues from 300-350 foot cantilever jackups increased $26.7
million (31.4%) primarily because of a 39.0% increase in average dayrates
($32.2 million), partially offset by lower utilization ($5.6 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 $28.4 million (32.7%), mainly due to a 38.4% increase in
average dayrates ($32.4 million), partially offset by reduced utilization of
Rig 134 in Indonesia ($4.0 million). Operating revenues for other marine rigs
increased $1.2 million (13.4%) primarily due to higher average dayrates for the
lake barge working in South America. Revenues from land rigs increased by $21.6
million (24.5%). Three new rigs, two in South America and one in North Africa,
operated in the nine months ended September 30, 1998 as compared with the same
period of 1997, increasing revenues by $4.1 million. Higher utilization of four
rigs that were placed in service in the Middle East during 1997 contributed
higher revenues of $15.1 million. The remaining increase of $2.3 million was
primarily due to a 6.5% increase in average dayrates earned, partially offset
by lower utilization of other rigs ($2.4 million), mainly in South America.
Revenues from drilling related services increased $6.7 million (11.1%)
primarily because of a $10.7 million increase in revenues from incentive
contracts, partially offset by a $4.0 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 the August, 1997 implementation of a joint venture company that operates
a third party semisubmersible in the Caspian Sea. Prior to that date, the rig
was operated solely by the Company. Decreased well engineering services in the
North Sea were partially offset by increased activity in the Middle East.
OPERATING COSTS. Total operating costs increased $41.2 million
(15.2%). Operating costs for the heavy duty harsh environment jackup rigs
increased $2.0 million (5.7%), primarily due to increased costs associated with
a new contract for the Magellan. Semisubmersible rig operating costs increased
$22.6
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million (76.9%) primarily due to the relocation of Rig 140 from the Gulf of
Mexico and costs incurred for a planned shipyard maintenance program prior to
commencing new work in the North Sea. Operating costs for the 300-350 foot
cantilever jackup rigs decreased $2.2 million (4.9%), mainly due to lower
utilization ($2.7 million), partially offset by increased costs due to rig
moves for the Parameswara and Compact Driller. Operating costs for 200-250 foot
jackup rigs increased $5.9 million (13.7%), mainly due to increased costs
associated with a new contract for the Key Victoria in South America, which
included increased labor and benefit costs stemming from a new collective
bargaining agreement that was put in effect in December 1997 and increased
costs associated with maintenance and support on the Key Bermuda in Nigeria.
Increased operating costs of $1.2 million (20.6%) 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 $12.1 million (20.1%)
primarily due to the staged deployment of seven additional rigs during the nine
months ended September 30, 1998 and 1997. In 1998, two rigs were deployed in
South America and one in North Africa, increasing operating costs by $3.2
million. Increased utilization of rigs deployed in 1997, two to Saudi Arabia
and two to the Kuwait-Saudi Partitioned Neutral Zone, resulted in increased
expense of $7.9 million. The remaining increase of $1.0 million in land rig
operating costs stemmed mainly from increased labor costs in South America due
to the implementation of a new collective bargaining agreement in December
1997. Operating costs from drilling related services increased $5.2 million
(8.7%). Incentive drilling expense increased $6.7 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 $1.5 million
mainly due to the August, 1997 implementation of a joint venture company that
operates a third party semisubmersible in the Caspian Sea, partially offset by
increased activity in the Middle East. The $5.7 million (58.4%) decrease in
other operating costs was primarily due to reduced provision for inventory
obsolescence.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased $2.4 million (16.6%) primarily due to increased employee benefit plan
costs ($1.1 million), increased costs associated with becoming a public company
in June 1997 ($0.7 million) and increased costs associated with higher staff
levels ($0.4 million).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $6.4 million (19.3%) for the nine months ended September 30, 1998 as
compared with the same period in the prior year. Depreciation of seven new land
rigs placed in service during 1998 and 1997 resulted in increased expense of
$2.9 million, with the remainder of the increase due to depreciation of general
capital additions to all other rigs and equipment.
OTHER INCOME (EXPENSE), NET. This category experienced a $1.6 million
decrease for the nine months ended September 30, 1998. Foreign exchange losses
increased $1.8 million, primarily resulting from unfavorable movements of the
dollar in relation to the Indonesian rupiah in the first six months of 1998.
Investment income increased by $0.2 million, primarily due to higher invested
balances.
PROVISION FOR TAXES ON INCOME. The provision for taxes on income
increased by $9.5 million (51.9%), primarily due to increased earnings in North
Africa, Southeast Asia, the U.K. and West Africa, leading to an increase in the
Company's effective tax rate to 12.0% from 10.5% for the same period in 1997.
NET INCOME. Net income for the nine months ended September 30, 1998
increased $48.9 million (31.4%) to $204.5 million as compared to $155.6 million
for the same period in the prior year. This increase resulted primarily from
the increase of $109.5 million in the Company's operating revenues, partially
offset by increased operating expense of $41.2 million, increased general and
administrative expense of $2.4 million, $6.4 million higher depreciation
expense, lower other income (expense), net of $1.6 million and an increased
provision for income taxes of $9.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $245.4 million and
$185.0 million for the nine months ended September 30, 1998 and 1997,
respectively. The increase in cash flows from operations was primarily
attributable to increased net income adjusted for non-cash charges. Investing
activities used cash of $207.7 million and $162.3 million for the nine month
periods ended September 30, 1998 and 1997, respectively. The increased usage in
investing activities of $45.3 million for the nine month periods was primarily
due to $64.5 million increased capital spending, partially offset by $4.6
million decreased advance payments related to construction of drilling rigs,
$7.7 million in increased net maturities and purchases of marketable securities
and $6.5 million in partial proceeds from the insurance settlement associated
with the
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loss of Rig 162. Capital expenditures totaled $204.7 million and $140.2 million
for the nine months ended September 30, 1998 and 1997, respectively,
principally related to rig expansion, upgrades and modernization. For the nine
month periods, capital expenditures on the heavy duty harsh environment jackup
rig Galaxy III and new land rigs increased $70.6 million and $25.6 million,
respectively, while spending on the Galaxy II decreased $15.0 million. Cash
used in financing activities was $11.2 million for the nine months ended
September 30, 1998 and consisted solely of dividends paid. For the nine months
ended September 30, 1997, the total cash used in financing activities was $63.1
million and consisted solely of cash distributions to Holdings pursuant to the
initial public offering of Ordinary Shares.
The Company expects to spend approximately $330.6 million on capital
projects during the year ended December 31, 1998, representing a total
reduction of approximately $53.7 million from the 1998 annual budget. The
reduction from budget is primarily in the area of expansion capital, due to the
postponement of $40 million discretionary spending for use in commencing
construction of a high specification heavy duty jackup rig and other timing
variances associated with the Galaxy II and Galaxy III projects and land rig
expansion ($13.1 million net decrease). Spending to meet contractual
obligations for customers and for rig upgrade, modernization and routine
maintenance projects is estimated to require approximately $63.7 million,
against a budget of $64.3 million, and represent numerous individual
transactions over the course of the year. The 1998 capital spending requirement
for the two new heavy duty harsh environment jackup rigs Galaxy II and Galaxy
III is estimated at approximately $192.3 million including the cost of
mobilizing the Galaxy II to its initial work assignment. Construction of the
Galaxy II is now complete and the rig has been mobilized to its initial work
location offshore Nova Scotia, Canada for final commissioning. The rig began
work under its five year contract on November 9, 1998. The Company believes it
has minimal exposure to significant cost increases in completing the Galaxy III
construction by mid-year 1999 as the construction contract with the shipyard is
a fixed price agreement, and the Company has to date been, and expects through
the completion of this construction project to be, successful in purchasing the
Company provided drilling equipment at price and delivery terms within the
Company's initial project estimates. The Company expects to incur 1998
expenditures of approximately $70.2 on the construction of five high
specification land rigs, four for use in South America and one for Kuwait.
Spending on the four South American rigs is expected to be essentially complete
by December 31, 1998. Two of these rigs, Rig 178 and Rig 179, were placed in
service on August 16,1998 and September 15, 1998, respectively. Rig 177 was
placed in service on October 12, 1998, and Rig 176 is expected to be placed in
service in late January 1999. Spending on the Kuwait rig, Rig 180, will carry
over into next year with operations expected to begin mid-1999. It is expected
that the 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 September 8, 1998, the Company's Board of Directors declared a
regular quarterly dividend of $0.0325 per Ordinary Share payable on October 15,
1998 to holders of record at the close of business September 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.
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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 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 marine
and land drilling activity. This reduced activity has led to generally lower
rig utilization across the industry. Lower worldwide demand has led to
increased competitive pressure within the drilling industry which has resulted
in reduced dayrates and lower rig utilization. It is expected these conditions
will continue into future periods, and such developments are expected to
negatively impact the Company's financial results in 1999.
IMPACT OF YEAR 2000
The Company has been actively pursuing solutions to the Millennium
Date Change Problem (Y2K) for approximately two years with initial activities
concentrating on Information Technology (IT) issues.
A Company-wide initiative was launched in January 1998 with the
formation of the Y2K Office responsible for coordinating the Y2K efforts and
reporting directly to the President and Chief Executive Officer. A Company
policy was issued in April stating as its goal `business as usual' and further
specifying that the Company intended to be prepared for Y2K by July 1999 with
the responsibility for the preparation resting on operating and administrative
management. Guidance as to minimum requirements included a structure for
organizing local initiatives, complete with milestones and reporting
requirements, definitions of conformity and operational significance and an
outline of a basic program of awareness, inventory, impact analysis,
mitigation, implementation and testing.
A Company-wide awareness campaign was mounted, with all operational
centers visited. At these meetings, Y2K policy and guidance was presented, and
the responsibilities of local management were discussed. Eighteen centers are
now working toward the solutions of their Y2K issues with the support of the
Y2K Office in Dallas, Texas.
Due to the diverse geographic location and the scope of the Company's
business activities, ranging from the operation of drilling rigs through the
procurement and supply of materials, the potential Y2K problems are being
considered in three categories: IT; Field Equipment; and Third Party
Relationships. To these three categories, a common set of analyses is applied
in order to evaluate the
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potential for the disruption of business. Evaluation of operational
significance of all potentially Y2K sensitive functions or components is key to
subsequent mitigation and remedial action.
IT issues include remediation of corporate-supported software,
including materials management, accounting and payroll systems and the upgrade
of non-compliant hardware and communication systems. Y2K software compliance is
expected to be finished by the end of 1998, with 80% of this effort now
completed. Final deployment of IT solutions is scheduled to be ongoing through
July 1999. Hardware (primarily computer) compliance is scheduled for completion
January 1999, with 80% of this effort also currently complete. All hardware is
expected to be deployed by July 1999.
As to Field Equipment issues, a considerable amount of electrical
equipment is used for control, monitoring and data acquisition on modern
drilling rigs, and this equipment contains imbedded microprocessors and is
potentially Y2K sensitive. A comprehensive inventory of all such equipment has
been compiled and assessed as to potential risk and appropriate remedial
action. Analysis to date has shown that many pieces of equipment are currently
Y2K compliant. Plans for verification of operation of critical items are in the
development phase and will include independent verification. Known
non-compliant equipment is in the process of being upgraded or replaced, with
implementation and testing targeted for completion in April 1999.
In the area of Third Party Relationships, the Company's business
relies heavily on the supply of goods and services from outside suppliers, and
failure of certain providers as a result of Y2K issues could cause serious
business disruption. In order to minimize potential disruption, all suppliers
of goods and services are being surveyed, and certain critical suppliers are
being audited as necessary, to determine their preparedness for Y2K. At
present, this effort is 30% complete. Where doubt exists, alternative sources
are being secured if available. If not, a contingency plan will be developed to
accommodate such failure.
In the event that Y2K compliance is not timely met in certain critical
areas, operating and administrative management are in the process of developing
contingency plans covering a wide range of issues that could adversely impact
business. These include failure of systems that affect safety and the
environment, supply of equipment and materials and provision of utilities,
particularly in third world countries. All major contingency plans are targeted
for completion in April 1999. It must, however, be clearly recognized that
contingency planning will continue to the millennium rollover date as
circumstances dictate.
Expected costs for the Company-wide Y2K initiative are estimated at
$4.9 million. 1998 Y2K expenditures are expected to be $1.2 million, with the
remaining $3.7 million spent in 1999. It should be noted, however, that since
full verification of Y2K compliance of field equipment is not yet complete,
unforeseen expenses that must be incurred to insure Y2K success may be
encountered. Y2K remediation costs are charged to operations on a current basis
as incurred.
The Company has determined that although its insurance does not cover
costs incurred to fix Y2K related problems, the Company will be reimbursed for
any physical loss or damage to the Company's insured property which results if
a Y2K related incident occurs.
Company management believes that an effective program is in place to
resolve the Y2K issue in a timely manner. Since it is not possible to
anticipate all eventualities, especially where third world countries are
concerned, circumstances could occur in which normal business operations could
not continue. The resulting cost of potential liability and loss of revenue has
not been included in estimates as detailed herein.
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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 operating in
Saudi Arabia, was severely damaged following a blowout and subsequent fire.
There were no personnel injuries. As provided for in the drilling contract, the
customer elected to cancel the remaining term of the contract and the Company
determined that the rig would not be rebuilt. An unrepaired partial loss
settlement has been negotiated with the Company's insurance carriers under
which total proceeds of $13.8 million will be received. Of these total
proceeds, $6.5 million had been received at September 30, 1998. It is expected
that the remainder of all proceeds will be received by December 31, 1998.
Negotiations are continuing with the Company's customer regarding equipment to
be salvaged and exported from the country; therefore, the final extent of the
equipment loss continues to be evaluated. The Company expects to recognize a
gain on this transaction in the fourth calendar quarter of 1998 when salvage
estimates are finalized. This gain is not expected to have a material impact on
the financial condition or results of operations of the Company.
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 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
Not applicable.
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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: November 13, 1998 SANTA FE INTERNATIONAL CORPORATION
By: /s/ D. G. Barber
-----------------------------------
D. G. Barber, Senior Vice President
and Chief Financial Officer
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