<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 0-13857
NOBLE DRILLING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-0374541
(State of incorporation) (I.R.S. employer identification number)
10370 RICHMOND AVENUE, SUITE 400 77042
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 974-3131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of Common Stock outstanding as of August 7, 1998: 131,278,404
===============================================================================
<PAGE> 2
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amount)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 53,344 $ 49,917
Investment in marketable debt securities ..................... -- 16,471
Accounts receivable (net allowance of $794 and $1,380) ....... 182,697 135,716
Costs of uncompleted contracts in excess of billings ......... 17,648 941
Inventories .................................................. 5,185 4,559
Deferred income taxes ........................................ 195 391
Prepaid expenses ............................................. 27,640 21,569
Other current assets ......................................... 21,881 35,451
----------- -----------
Total current assets ........................................... 308,590 265,015
----------- -----------
PROPERTY AND EQUIPMENT
Drilling equipment and facilities ............................ 1,686,467 1,426,537
Other ........................................................ 28,615 24,287
----------- -----------
1,715,082 1,450,824
Accumulated depreciation ..................................... (291,963) (256,613)
----------- -----------
1,423,119 1,194,211
----------- -----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES .................. 50,277 21,097
DEFERRED INCOME TAXES .......................................... 4,762 5,947
OTHER ASSETS ................................................... 25,336 19,541
----------- -----------
$ 1,812,084 $ 1,505,811
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current installments of long-term debt ... $ 151,834 $ 9,698
Accounts payable ............................................. 112,424 77,366
Accrued payroll and related costs ............................ 22,246 25,858
Taxes payable ................................................ 29,166 23,708
Interest payable ............................................. 5,888 6,088
Other current liabilities .................................... 26,197 10,172
----------- -----------
Total current liabilities ...................................... 347,755 152,890
LONG-TERM DEBT ................................................. 134,253 138,139
DEFERRED INCOME TAXES .......................................... 78,920 63,946
OTHER LIABILITIES .............................................. 988 1,782
----------- -----------
561,916 356,757
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $0.10 par value ................................ 13,360 13,334
Capital in excess of par value ............................... 941,125 934,383
Retained earnings ............................................ 352,625 255,992
Treasury stock, at cost ...................................... (55,759) (53,544)
Accumulated other comprehensive income ....................... (1,183) (1,111)
----------- -----------
1,250,168 1,149,054
----------- -----------
COMMITMENTS AND CONTINGENCIES .................................. -- --
=========== ===========
$ 1,812,084 $ 1,505,811
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 3
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services ................................. $ 158,529 $ 114,820
Labor contract drilling services ........................... 16,267 9,871
Turnkey drilling services .................................. 39,846 55,973
Engineering and consulting services ........................ 522 491
Other revenue .............................................. 1,064 3,837
--------- ---------
216,228 184,992
--------- ---------
OPERATING COSTS AND EXPENSES
Contract drilling services ................................. 58,788 41,854
Labor contract drilling services ........................... 12,219 7,012
Turnkey drilling services .................................. 35,730 54,706
Engineering and consulting services ........................ 431 671
Other expense .............................................. 634 974
Depreciation and amortization .............................. 19,986 19,306
Selling, general and administrative ........................ 18,135 15,166
Gains on sales of property and equipment, net of impairments -- (197,676)
Minority interest .......................................... -- 102
--------- ---------
145,923 (57,885)
--------- ---------
OPERATING INCOME .............................................. 70,305 242,877
OTHER INCOME (EXPENSE)
Interest expense ........................................... (1,110) (4,638)
Interest income ............................................ 1,502 3,162
Other, net ................................................. 2,246 681
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE ........... 72,943 242,082
INCOME TAX PROVISION .......................................... (22,539) (80,382)
--------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ............................ 50,404 161,700
EXTRAORDINARY CHARGE, NET OF TAX .............................. -- (4,981)
--------- ---------
NET INCOME .................................................... $ 50,404 $ 156,719
========= =========
EARNINGS PER SHARE-BASIC:
Income before extraordinary charge .......................... $ 0.38 $ 1.22
Extraordinary charge ........................................ -- (0.04)
--------- ---------
Net income per common share ................................. $ 0.38 $ 1.18
========= =========
EARNINGS PER SHARE-DILUTED:
Income before extraordinary charge .......................... $ 0.38 $ 1.21
Extraordinary charge ........................................ -- (0.04)
--------- ---------
Net income per common share ................................. $ 0.38 $ 1.17
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services ..................................... $ 305,571 $ 228,199
Labor contract drilling services ............................... 34,534 19,223
Turnkey drilling services ...................................... 59,848 99,001
Engineering and consulting services ............................ 1,206 1,354
Other revenue .................................................. 4,105 5,930
--------- ---------
405,264 353,707
--------- ---------
OPERATING COSTS AND EXPENSES
Contract drilling services ..................................... 111,718 93,687
Labor contract drilling services ............................... 24,419 13,569
Turnkey drilling services ...................................... 54,489 93,916
Engineering and consulting services ............................ 1,069 1,232
Other expense .................................................. 2,006 2,175
Depreciation and amortization .................................. 38,733 36,882
Selling, general and administrative ............................ 36,210 31,478
Gains on sales of property and equipment, net of impairments ... -- (197,676)
Minority interest .............................................. -- 505
--------- ---------
268,644 75,768
--------- ---------
OPERATING INCOME .................................................. 136,620 277,939
OTHER INCOME (EXPENSE)
Interest expense ............................................... (2,242) (10,095)
Interest income ................................................ 3,077 5,049
Other, net ..................................................... 1,806 1,539
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE ............... 139,261 274,432
INCOME TAX PROVISION .............................................. (42,628) (89,084)
--------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ................................ 96,633 185,348
EXTRAORDINARY CHARGE, NET OF TAX .................................. -- (6,685)
--------- ---------
NET INCOME ........................................................ $ 96,633 $ 178,663
========= =========
EARNINGS PER SHARE-BASIC:
Income before extraordinary charge .............................. $ 0.74 $ 1.40
Extraordinary charge ............................................ -- (0.05)
--------- ---------
Net income per common share ..................................... $ 0.74 $ 1.35
========= =========
EARNINGS PER SHARE-DILUTED:
Income before extraordinary charge .............................. $ 0.73 $ 1.38
Extraordinary charge ............................................ -- (0.05)
--------- ---------
Net income per common share ..................................... $ 0.73 $ 1.33
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
NET INCOME ................................................................ $ 50,404 $ 156,719
--------- ---------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments ............................... (26) 264
--------- ---------
Unrealized gains on securities:
Unrealized holding gains arising during period ....................... -- 33
Less: reclassification adjustment for gains realized in net income ... -- --
--------- ---------
Net unrealized gains ................................................. -- 33
--------- ---------
Other comprehensive (loss) income ...................................... (26) 297
--------- ---------
COMPREHENSIVE INCOME ...................................................... $ 50,378 $ 157,016
========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
NET INCOME ................................................................ $ 96,633 $ 178,663
--------- ---------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments ............................... (56) (335)
--------- ---------
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period .............. (20) 35
Less: reclassification adjustment for gains realized in net income ... 4 --
--------- ---------
Net unrealized (losses) gains ........................................ (16) 35
--------- ---------
Other comprehensive loss ............................................... (72) (300)
--------- ---------
COMPREHENSIVE INCOME ...................................................... $ 96,561 $ 178,363
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 96,633 $ 178,663
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................. 38,733 36,882
Deferred income tax provision ................................. 16,355 32,926
Gain on sales of property and equipment, net of impairments ... (855) (197,676)
Extraordinary charge, net of tax .............................. -- 6,685
Other ......................................................... 802 174
Changes in current assets and liabilities:
Accounts receivable .......................................... (50,904) (17,377)
Proceeds from sale of marketable equity securities, net ...... -- 2,353
Other assets ................................................. (9,669) (18,936)
Accounts payable ............................................. 35,061 42,427
Other liabilities ............................................ 20,560 51,596
--------- ---------
Net cash provided by operating activities .................... 146,716 117,717
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ................................. (267,528) (124,375)
Proceeds from sale of property and equipment ....................... 1,929 268,818
Investment in and notes receivable from affiliates ................. (29,925) (12,222)
Proceeds from sale of marketable debt securities ................... 16,450 (100,031)
--------- ---------
Net cash (used) provided by activities ....................... (279,074) 32,190
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving credit facility ........................ 140,000 --
Payment of long-term debt .......................................... (5,401) (125,186)
Issuance of common stock ........................................... 1,186 2,081
--------- ---------
Net cash provided (used) by financing activities ............. 135,785 (123,105)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ................................ 3,427 26,802
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................... 49,917 149,632
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................. $ 53,344 $ 176,434
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE> 7
FORM 10-Q
NOTE 1 - BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements of Noble
Drilling Corporation ("Noble Drilling" or, together with its consolidated
subsidiaries, unless the context requires otherwise, the "Company"), have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all disclosures required by
generally accepted accounting principles for complete financial statements. All
significant transactions among Noble Drilling and its consolidated subsidiaries
have been eliminated. The condensed consolidated financial statements have not
been audited. However, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
condensed consolidated financial statements have been included. Results of
operations for interim periods are not necessarily indicative of the results of
operations that may be expected for the entire year. These interim condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made in prior year condensed
consolidated financial statements to conform to the classifications used in the
1998 condensed consolidated financial statements. These reclassifications have
no impact on net income.
NOTE 2 - EARNINGS PER SHARE
The Company has adopted SFAS No. 128, Earnings Per Share ("SFAS 128"),
which established new guidelines for computing and presenting earnings per
share. All prior period earnings per share data have been restated to conform to
the provisions of SFAS 128. Net income per common share has been computed on the
basis of the weighted average number of common shares and, where dilutive,
common share equivalents outstanding during the indicated periods.
The following table reconciles the basic and diluted earnings per share
computations for income before extraordinary charge for the three and six month
periods ended June 30, 1998 and 1997 (In thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY BASIC BASIC DILUTED DILUTED
CHARGE SHARES EPS SHARES EPS
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
JUNE 30, 1998 $ 50,404 131,233 $0.38 132,518 $0.38
JUNE 30, 1997 $161,700 132,458 $1.22 134,008 $1.21
SIX MONTHS ENDED:
JUNE 30, 1998 $ 96,633 131,142 $0.74 132,483 $0.73
JUNE 30, 1997 $185,348 132,305 $1.40 133,878 $1.38
</TABLE>
Included in diluted shares are common stock equivalents relating to
outstanding stock options of 1,285,000 and 1,550,000 for the three month periods
ended June 30, 1998 and 1997, respectively, and 1,341,000 and 1,573,000 for the
six month periods ended June 30, 1998 and 1997, respectively.
7
<PAGE> 8
FORM 10-Q
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 established standards for reporting
and displaying comprehensive income and its components. Components of
comprehensive income are net income and all changes in equity during a period
except those resulting from transactions with owners. SFAS 130 requires
enterprises to display comprehensive income and its components in its financial
statements, to classify items of comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income in shareholders' equity separately from retained earnings and additional
paid-in capital. Comparative financial statements provided for earlier periods
have been reclassified to reflect the application of SFAS 130.
The following table sets forth the components of accumulated other
comprehensive income at June 30, 1998 (In thousands):
<TABLE>
<CAPTION>
UNREALIZED GAINS ACCUMULATED
FOREIGN (LOSSES) OTHER
CURRENCY ON COMPREHENSIVE
ITEMS SECURITIES INCOME
-------- ---------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 .... $(1,127) $ 16 $(1,111)
Current-period change ........... (56) (16) (72)
------- -------- -------
Balance at June 30, 1998 ........ $(1,183) $ -- $(1,183)
======= ======== =======
</TABLE>
NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
In June 1998, the Company formed Ilion LLC, a limited liability
company, that purchased the Ilion, a Friede & Goldman 9500 Enhanced Pacesetter
design semisubmersible. The Company has an initial 50 percent equity interest in
Ilion LLC. The total investment balance at June 30, 1998 was $12,825,000. In
addition, the Company has funded $17,100,000 to Ilion LLC in the form of a
convertible promissory note pursuant to which the Company can ultimately
increase its equity interest in Ilion LLC to 70 percent.
The Ilion is the same design as the Noble Homer Ferrington and is
currently located in Pascagoula, Mississippi. The Noble Homer Ferrington is
currently in the shipyard undergoing refurbishment and upgrade for work in
deeper water depths. Plans call for the Ilion to be similarly upgraded for
deepwater work when the Company receives a long-term contract with an operator.
NOTE 5 - CREDIT FACILITIES
The Company has an unsecured revolving credit facility in the amount
of $200,000,000 (the "Credit Agreement") through August 14, 2002. As of June 30,
1998, the Company had an outstanding balance of $140,000,000 under the Credit
Agreement and $3,632,000 had been used to support outstanding letters of credit.
At June 30, 1998, the Company had an additional line of credit totaling
$7,500,000, of which $2,397,000 had been used to support outstanding letters of
credit. Additionally, at June 30, 1998, $21,223,000 of outstanding letters of
credit had been supported through a combination of unsecured letter of credit
facilities and surety bonds. The interest rate on borrowings under the Credit
Agreement was 6.04 percent at June 30, 1998.
NOTE 6 - FINANCIAL INSTRUMENTS
The Company operates internationally, resulting in exposure to foreign
currency risk. The Company predominantly denominates its contracts in U.S.
Dollars to mitigate the exposure to fluctuations in foreign currencies. The
Company periodically uses foreign exchange derivative instruments or spot
purchases to hedge its known liabilities in foreign currencies to reduce the
impact of foreign currency gains and losses in its financial results. The
Company does not enter into derivative transactions for speculative purposes.
Gains and losses on
8
<PAGE> 9
FORM 10-Q
foreign exchange derivative instruments, which qualify as accounting hedges, are
deferred and recognized when the underlying foreign exchange exposure is
realized. Gains and losses on foreign exchange derivative instruments that do
not qualify as hedges for accounting purposes are recognized currently based on
the change in the market value of the derivative instrument. During the
six-month period ended June 30, 1998, the Company entered into various foreign
currency exchange contracts. These contracts expire monthly throughout the
remainder of 1998 and require the Company to exchange U.S. Dollars for Dutch
Guilders and British Pounds Sterling totaling $12,000,000 and $17,000,000,
respectively. There were no material gains or losses recognized during the
three-month and six-month periods ended June 30, 1998. At June 30, 1998 there
were no material unrealized gains or losses on open foreign exchange derivative
hedges. The Company did not utilize foreign exchange derivative instruments in
1997.
In connection with project financing the Company is seeking to obtain
for the Noble Paul Romano conversion, on June 24, 1998, the Company entered into
an interest rate swap contract with a notional amount of $137,750,000 to
minimize the Company's exposure to interest rate increases during the period
from June 24, 1998 to September 15, 1998, the termination date of the interest
rate swap contract. The market value of the swap will be calculated on the
termination date and the differential paid or received under the contract will
be recognized over the term of the financing as an adjustment to the effective
yield of the underlying financial instrument.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
items; effects of certain changes in fair value are recorded in Other
Comprehensive Income pending recognition in earnings. SFAS 133 is effective for
fiscal years beginning after June 15, 1999 and is not expected to have a
material effect on the Company's results of operations or financial position.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with several vendors to
purchase equipment or for the construction of equipment for the conversion of
rigs, which agreements generally require non-refundable payments as certain
milestones are met. The amount of such payments totaled $51,816,000 as of June
30, 1998. As of June 30, 1998, the Company also had $105,761,000 of purchase
commitments with a remaining term in excess of one year related to rig
conversion projects. In the event the Company were to cancel the purchase
commitments, the ultimate amounts refunded would be subject to negotiation.
NOTE 8 - SUBSEQUENT EVENTS
In July 1998, the Company purchased the Shelf 6, a Friede & Goldman
9500 Enhanced Pacesetter design semisubmersible, for $24,100,000 in cash. The
unit is currently located outside Wakkanai Harbor, Japan. This unit, which was
built in 1986 and is currently rated to operate in 600 feet of water, is the
same design as the Noble Homer Ferrington and the Ilion. Plans call for the
Shelf 6 to undergo refurbishment and upgrade for work in deeper water depths
upon the Company securing a long-term drilling contract.
In July 1998, Noble Drilling (Paul Wolff) Ltd., an indirect, wholly
owned subsidiary of the Company and owner of the Noble Paul Wolff, issued
$145,000,000 principal amount of its fixed rate senior secured notes (the
"Wolff Notes") in three series. The Wolff Notes bear interest at rates of 6.43
percent to 6.55 percent per annum. One series of the Wolff Notes matures on
December 1, 2001 and the other two series mature on December 1, 2004. Principal
and interest payments are payable quarterly on the first day of September,
December, March and June except that the first two quarterly payments (and the
quarterly payments thereafter through September 1, 2001 in the case of one
series) are interest only. The Wolff Notes are guaranteed by Noble Drilling and
are secured by a first mortgage on the Noble Paul Wolff and, until completion
of its conversion to an EVA-4000(TM) semisubmersible, a first mortgage on the
Noble Roger Eason and Noble Leo Segerius. The Wolff Notes can be prepaid, in
whole or in part, at a premium at any time after June 1, 2001.
9
<PAGE> 10
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, industry conditions, and
indebtedness covenant compliance, are forward-looking statements. 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. Important factors that could cause actual results to
differ materially from the Company's expectations include, but are not limited
to, intense competition in the drilling industry, volatility of oil and gas
prices, political and economic conditions in international markets (including
Nigeria and Venezuela), potential for decrease in demand for drilling services
in the U.S. Gulf of Mexico ("U.S. Gulf") where the Company has a concentration
of drilling rigs, risks associated with turnkey drilling contracts, early
termination provisions generally found in the Company's offshore drilling
contracts, operational risks (such as blowouts, fires and loss of production),
insurance coverage limitations, and requirements and potential liability imposed
by governmental regulation of the drilling industry (including environmental
regulation).
OUTLOOK
As used herein, unless otherwise required by the context, "Noble
Drilling" refers to Noble Drilling Corporation and the "Company" refers to Noble
Drilling and its consolidated subsidiaries. The Company's business strategy has
been to expand its international and offshore drilling capabilities through
acquisitions and rig upgrades and modifications, and by redeploying assets in
important geological areas. In recent years, the Company has focused on
increasing the number of rigs in its fleet capable of drilling in deeper water
depths. To date, increased levels of activity in offshore world oil and U.S.
natural gas exploration, development and production in deeper water depths have
supported the expansion of the Company's deepwater drilling fleet. Such activity
levels are affected both by short-term and long-term trends in oil and natural
gas prices. During the first six months of 1998, crude oil prices have
experienced downward pressure as a result of a number of economic and political
factors. As a result, exploration and production expenditures of operators have
been reduced in certain markets in which the Company operates drilling units,
and the utilization and resulting dayrates for the Company's drilling units have
been negatively impacted. Dayrates in the U.S. Gulf, where the Company operates
nine drilling units, have deteriorated significantly over the past six months
and the Company is also experiencing softness in demand for its rigs currently
located in Venezuela and the Middle East.
As part of its deepwater expansion strategy, the Company expects to
deliver its first EVA-4000(TM) semisubmersible conversion, the Noble Paul
Romano, in the third quarter of 1998 and its second EVA-4000(TM) conversion, the
Noble Paul Wolff, late in 1998. Four other semisubmersible conversions are
planned or in progress and are expected to be available for service in 1999 or
early 2000. The Noble Paul Romano, which will be capable of drilling in 6,000
feet of water, has been contracted to Shell Deepwater Development Inc. ("Shell
Deepwater"), an affiliate of Shell Oil Company, for a five year contract in the
U.S. Gulf. The Noble Paul Wolff, which will be capable of drilling in 8,900 feet
of water, has been contracted to Petroleo Brasiliero S.A. ("Petrobras") for six
years in Brazil. The Noble Jim Thompson, which will be capable of drilling in
6,000 feet of water, is under a letter of intent to be contracted to Shell
Deepwater for an initial term of three years, with options to extend by Shell
Deepwater, in the U.S. Gulf. Delivery is anticipated in the first quarter of
1999. The Noble Amos Runner, which will be capable of drilling in 6,600 foot
water depths, has been contracted to a rig-sharing consortium of operators for a
five year term in the U.S. Gulf. The rig is expected to be delivered in 1999.
The Noble Max Smith, which will be capable of drilling in 6,000 feet of water,
is under a letter of intent to be contracted for work in the U.S. Gulf by two
operators, Amerada Hess Corporation and Union Pacific Resources Corporation. The
initial term of the drilling
10
<PAGE> 11
FORM 10-Q
contract will be for five years with options to the operators to extend. The rig
is expected to be delivered in the third quarter of 1999.
In addition to the EVA-4000(TM) semisubmersible conversions, the
Company owns or controls three Friede & Goldman 9500 Enhanced Pacesetter
semisubmersibles which it intends to convert to deepwater drilling units. The
Noble Homer Ferrington, which will be capable of drilling in 6,000 feet of
water, is under a letter of intent to a rig-sharing consortium of operators for
a five year term in the U.S. Gulf. In June 1998, the Company formed Ilion LLC, a
limited liability company, that purchased the Ilion, a Friede & Goldman 9500
Enhanced Pacesetter semisubmersible. The Company has an initial 50 percent
equity interest in Ilion LLC. The Company plans to upgrade the Ilion for
deepwater work when a long-term contract is received.
On July 28, 1998, the Company announced that it had acquired an
additional Friede & Goldman 9500 Enhanced Pacesetter semisubmersible, the Shelf
6. The unit is currently located outside Wakkanai Harbor, Japan, and the Company
intends to upgrade the rig to work in deeper water depths upon securing a
long-term contract.
The Noble Roger Eason and the Noble Muravlenko are undergoing the final
stages of their water depth upgrades and are scheduled to be available in the
latter part of 1998. Upon completion of the upgrades, the rigs will begin
operations under a five year contract with Petrobras.
The Company anticipates a decrease in the total number of turnkey well
completions in 1998 as compared to 1997. For the year ended December 31, 1997,
there were 35 turnkey well completions. Profitability under a turnkey contract
is dependent upon keeping expenses within the estimates used by the Company in
determining the contract price.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the second quarter of 1998 (the "Current Quarter") was
$50,404,000, or $0.38 per diluted share, on operating revenues of $216,228,000,
compared to net income of $156,719,000, or $1.17 per diluted share, on operating
revenues of $184,992,000 for the second quarter of 1997 (the "Comparable
Quarter"). Excluding the effects of non-recurring items, net income in the
Comparable Quarter was $33,211,000, or $0.25 per share. The increases in
revenues and net income were principally the result of higher domestic and
international average dayrates and contributions from the Noble Bill Jennings,
Noble Leonard Jones, Noble Lewis Dugger, Noble Joe Alford, Noble Lester Pettus
and Noble Fri Rodli, which were reactivated subsequent to the Comparable
Quarter. The improved revenue from dayrate increases and reactivated rigs was
partially offset by the sale of the Company's mat-supported jackup fleet in the
Comparable Quarter. Results for the Comparable Quarter included a pre-tax gain
of $197,676,000 ($128,489,000 after-tax) related to the sale of the company's 12
mat-supported jackup rigs and an extraordinary charge of $4,981,000, related to
the Company's purchase of $81,330,000 principal amount of its 9 1/4% Senior
Notes Due 2003 (the "9 1/4% Senior Notes").
11
<PAGE> 12
FORM 10-Q
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average dayrates for the Company's rig fleet for the three
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATES
--------------------- --------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
--------------------- --------------------- --------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
International ... 90% 98% 2,283 2,476 $52,017 $35,647
Domestic ........ 89% 100% 813 780 $51,010 $34,047
</TABLE>
- ------------------
(1) Information reflects the policy of the Company to report utilization rates
based on the number of actively marketed rigs owned in the fleet.
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's international operations for the three months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
----------------------- ------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ............ $118,755 $ 88,263 $ 70,264 $ 52,712
Labor contract drilling services ...... 16,267 9,871 4,048 2,859
Turnkey drilling services ............. 72 15,202 (3,123) (107)
Engineering and consulting services ... 522 491 91 185
Other revenue ......................... 229 2,869 (149) 2,105
======== ======== ======== ========
Total ........................ $135,845 $116,696 $ 71,131 $ 57,754
======== ======== ======== ========
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
increased $30,492,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to higher average dayrates. Contract drilling revenues in
Qatar, the North Sea and West Africa increased due to certain contract renewals
at higher dayrates. In addition, international contract drilling revenues were
higher primarily due to the Noble John Sandifer being moved to the Bay of
Campeche from the U.S. Gulf to begin work under a two year contract. Labor
contract drilling services revenues increased $6,396,000 in the Current Quarter
due primarily to revenues generated from the Hibernia Project in Canada as well
as from higher average dayrates on the North Sea platform contracts.
International turnkey drilling services revenues decreased $15,130,000 in the
Current Quarter as compared to the Comparable Quarter. There were no turnkey
well completions in the Current Quarter as compared to three turnkey well
completions in the Comparable Quarter. At June 30, 1998, there was one
international turnkey well in progress offshore Mexico.
GROSS MARGIN. International contract drilling services gross margin
increased $17,552,000 in the Current Quarter as compared to the Comparable
Quarter. This was primarily due to higher dayrates received on certain contract
renewals in Qatar, the North Sea and West Africa. Labor contract drilling
services gross margin increased $1,189,000 in the Current Quarter as compared to
the Comparable Quarter as a result of the contribution of the Hibernia Project
in Canada and higher average dayrates experienced on the North Sea platform
contracts. The
12
<PAGE> 13
FORM 10-Q
negative results from international turnkey drilling services in the Current
Quarter are attributable to unexpected drilling delays experienced on a turnkey
well offshore Mexico in progress at June 30, 1998. At that date, the Company had
fully accrued for the estimated loss on this well.
DOMESTIC OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's domestic operations for the three months ended June 30, 1998
and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
----------------------- -----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ............ $ 39,774 $ 26,557 $ 29,477 $ 20,254
Turnkey drilling services ............. 39,774 40,771 7,239 1,374
Engineering and consulting services ... -- -- -- (365)
Other revenue ......................... 835 968 579 758
-------- -------- -------- --------
Total ........................ $ 80,383 $ 68,296 $ 37,295 $ 22,021
======== ======== ======== ========
</TABLE>
OPERATING REVENUES. Domestic contract drilling services revenues
increased $13,217,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to higher average dayrates and the revenues generated from
the recently reactivated rigs, the Noble Bill Jennings, Noble Leonard Jones,
Noble Joe Alford, Noble Lester Pettus and Noble Fri Rodli. These increases were
partially offset by the decrease in revenues resulting from the sale of the
Company's mat-supported jackup fleet in the second quarter of 1997, as well as
the move of the Noble John Sandifer to Mexico to begin working under a two-year
drilling contract. Domestic turnkey drilling services revenues were $997,000
lower in the Current Quarter as compared to the Comparable Quarter due to fewer
well completions in the Current Quarter, which was offset partially by an
increase in the average contract value per completed well in the Current
Quarter. There were six domestic turnkey well completions in the Current Quarter
as compared to nine completions in the Comparable Quarter.
GROSS MARGIN. Domestic contract drilling services gross margin
increased $9,223,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to higher average domestic dayrates and contributions from
recently reactivated rigs. Domestic turnkey drilling services gross margin
increased $5,865,000 in the Current Quarter as compared to the Comparable
Quarter as a result of losses experienced on two turnkey wells in the Comparable
Quarter.
OTHER OPERATING ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $680,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to depreciation expense related to the upgrade costs on
recently reactivated rigs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2,969,000 in the Current Quarter as compared
to the Comparable Quarter due primarily to higher personnel costs incurred to
support overall growth of the Company and increased recruiting and training
activity.
INTEREST EXPENSE. Interest expense decreased $3,528,000 in the Current
Quarter as compared to the Comparable Quarter due primarily to the
capitalization of approximately $3,600,000 of interest expense on upgrade
projects in the Current Quarter.
INTEREST INCOME. Interest income decreased $1,660,000 in the Current
Quarter as compared to the Comparable Quarter due to lower average cash balances
in the Current Quarter.
13
<PAGE> 14
FORM 10-Q
INCOME TAX PROVISION. Income tax expense decreased in the Current
Quarter as compared to the Comparable Quarter. Income taxes of $69,187,000 were
recorded in the Comparable Quarter in connection with the gain on the sale of
the mat rigs. Excluding non-recurring items, income tax expense increased
$11,344,000 in the Current Quarter as compared to the Comparable Quarter due
primarily to higher pre-tax earnings.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the six months ended June 30, 1998 (the "Current
Period") was $96,633,000, or $0.73 per diluted share, on operating revenues of
$405,264,000, compared to net income of $178,663,000, or $1.33 per diluted
share, on operating revenues of $353,707,000 for the six months ended June 30,
1997 (the "Comparable Period").
Results for the Comparable Period included a pre-tax gain of
$197,676,000 ($128,489,000 after-tax) related to the sale of the mat rigs, and
an extraordinary charge of $6,685,000 resulting from the Company's repurchase of
$110,885,000 principal amount of its 9 1/4 % Senior Notes. Excluding the effects
of non-recurring items, net income was $56,859,000, or $0.42 per diluted share,
for the Comparable period.
The increases in revenues and net income were principally the result of
higher domestic and international average dayrates and contributions from the
Noble Bill Jennings, Noble Leonard Jones, Noble Lewis Dugger, Noble Joe Alford,
Noble Lester Pettus and Noble Fri Rodli, which were reactivated subsequent to
the Comparable Period. The improved revenue from dayrate increases and
reactivated rigs was partially offset by the sale of the mat rigs in the second
quarter of 1997.
14
<PAGE> 15
FORM 10-Q
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average dayrates for the Company's rig fleet for the six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATES
---------------------- --------------------- ---------------------
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
---------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
International ... 90% 95% 4,542 4,817 $49,362 $34,404
Domestic ........ 94% 99% 1,605 2,003 $51,756 $31,191
</TABLE>
- ------------------
(1) Information reflects the policy of the Company to report utilization rates
based on the number of actively marketed rigs owned in the fleet.
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's international operations for the six months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
------------------------ -------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ............ $ 224,201 $ 165,724 $ 133,177 $ 93,611
Labor contract drilling services ...... 34,534 19,223 10,115 5,654
Turnkey drilling services ............. 3,463 29,550 (4,632) 4,561
Engineering and consulting services ... 1,206 656 137 99
Other revenue ......................... 2,161 4,175 639 3,186
--------- --------- --------- ---------
Total ........................ $ 265,565 $ 219,328 $ 139,436 $ 107,111
========= ========= ========= =========
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
increased $58,477,000 in the Current Period as compared to the Comparable Period
due primarily to higher average dayrates and the mobilization of the Noble John
Sandifer from the U.S. Gulf to the Bay of Campeche. Labor contract drilling
services revenues increased $15,311,000 in the Current Period due primarily to
revenues generated from the Hibernia Project in Canada as well as from higher
average dayrates on the North Sea platform contracts. International turnkey
drilling services revenues decreased $26,087,000 in the Current Period due to
fewer well completions. At June 30, 1998, there was one international turnkey
well in progress offshore Mexico.
GROSS MARGIN. International contract drilling services gross margin
increased $39,566,000 in the Current Period as compared to the Comparable
Period. This was primarily due to higher dayrates received on certain contract
renewals in all of the Company's international areas of operation. Labor
contract drilling services gross margin increased $4,461,000 in the Current
Period as compared to the Comparable Period due to the contribution of the
Hibernia Project in Canada and higher average dayrates experienced on the North
Sea platform contracts. The negative results from international turnkey drilling
services are attributable to unexpected drilling delays experienced on a turnkey
well offshore Mexico in progress at June 30, 1998. At that date, the Company had
fully accrued for the estimated loss on this well.
15
<PAGE> 16
FORM 10-Q
DOMESTIC OPERATIONS
The following table sets forth the operating revenues and gross margin
for the Company's domestic operations for the six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
---------------------- ----------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ............ $ 81,370 $ 62,475 $ 60,676 $ 40,901
Turnkey drilling services ............. 56,385 69,451 9,991 524
Engineering and consulting services ... -- 698 -- 23
Other revenue ......................... 1,944 1,755 1,460 569
-------- -------- -------- --------
Total ........................ $139,699 $134,379 $ 72,127 $ 42,017
======== ======== ======== ========
</TABLE>
OPERATING REVENUES. Domestic contract drilling services revenues
increased $18,895,000 in the Current Period as compared to the Comparable Period
due primarily to higher average dayrates and the revenues generated from the
recently reactivated rigs, the Noble Bill Jennings, Noble Leonard Jones, Noble
Joe Alford, Noble Lester Pettus and Noble Fri Rodli. These increases were
partially offset by the decrease in revenues resulting from the sale of the
Company's mat-supported jackup fleet in the second quarter of 1997, as well as
the move of the Noble John Sandifer to Mexico to begin working under a two year
drilling contract. Additionally, domestic contract drilling services revenues
were negatively impacted as a result of the Noble Paul Wolff, Noble Jim Thompson
and Noble Amos Runner being taken out of service in 1997 for conversion to
EVA-4000(TM) semisubmersibles. Domestic turnkey drilling services revenues were
$13,066,000 lower in the Current Period as compared to the Comparable Period due
to fewer well completions in the Current Period.
GROSS MARGIN. Domestic contract drilling services gross margin
increased $19,775,000 in the Current Period as compared to the Comparable Period
due primarily to higher average domestic dayrates. Domestic turnkey drilling
services gross margin increased $9,467,000 in the Current Period as compared to
the Comparable Period as a result of losses experienced on two turnkey wells in
the Comparable Period.
OTHER OPERATING ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $1,851,000 in the Current Period as compared to the Comparable
Period due primarily to depreciation expense related to the upgrade costs on
rigs reactivated in the Current Period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4,732,000 in the Current Period as compared
to the Comparable Period due primarily to higher personnel costs incurred to
support overall growth of the Company and increased recruiting and training
activity.
INTEREST EXPENSE. Interest expense decreased $7,853,000 in the Current
Period as compared to the Comparable Period due primarily to the Company's
repurchase of its 9 1/4% Senior Notes in the second quarter of 1997 and the
capitalization of approximately $6,000,000 of interest expense on upgrade
projects in the Current Period.
INTEREST INCOME. Interest income decreased $1,972,000 in the Current
Period as compared to the Comparable Period due to lower average cash balances
in the Current Quarter.
INCOME TAX PROVISION. Income tax expense decreased $46,456,000 in the
Current Period as compared to the Comparable Period. The Comparable Period
included $69,187,000 of taxes related to the gain on the sale of the mat rigs.
Excluding non-recurring items, income tax expense increased $22,731,000 in the
Current Period as compared to the Comparable Period due primarily to higher
pre-tax earnings.
16
<PAGE> 17
FORM 10-Q
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
During the Current Quarter, the Company accessed the private debt
markets in connection with project financings for certain of its EVA-4000(TM)
semisubmersible conversions. Pending completion of such financings, the Company
borrowed $140,000,000 under its $200,000,000 unsecured revolving credit facility
(the "Credit Agreement") to pay for its ongoing semisubmersible conversion
projects and other rig upgrades. The temporary use of short-term borrowings
under the Credit Agreement resulted in negative working capital of $39,165,000
at June 30, 1998 as compared to positive working capital at December 31, 1997 of
$113,125,000. After completion of the project financing for the Noble Paul Wolff
in July 1998 (see "Credit Facilities and Long-Term Debt" below), the Company
repaid $80,000,00 of short-term borrowings under the Credit Agreement. The
Company continues to seek to obtain additional project financings for certain of
its semisubmersible conversion projects. Long-term debt as a percentage of
long-term debt plus shareholders' equity was 10 percent at June 30, 1998
compared to 11 percent at December 31, 1997.
At June 30, 1998, the Company had cash and cash equivalents of
$53,344,000 and had $59,201,000 of funds available under various lines of
credit. The Company expects to generate positive cash flow from operations for
the remainder of 1998, assuming no material decrease in demand for contract
drilling and turnkey services. The Company will continue to have cash
requirements for debt principal and interest payments. For the remainder of
1998, required debt principal and interest payments for currently outstanding
debt are estimated to be approximately $14,700,000. The Company expects to fund
these obligations out of cash and short-term investments as well as cash
expected to be provided by operations.
Capital expenditures totaled $267,528,000 and $124,375,000 for the
Current Period and Comparable Period, respectively. Capital expenditures for the
remainder of 1998 are expected to aggregate approximately $297,000,000, of which
the majority are discretionary and relate to upgrades of equipment. This amount
includes approximately $235,000,000 for the conversions of the Noble Paul
Romano, Noble Paul Wolff, Noble Jim Thompson, Noble Amos Runner and Noble Max
Smith to EVA-4000(TM) semisubmersibles. Additionally, the Company expects to
spend approximately $150,000,000 in 1998 and 1999 to upgrade the equipment and
water depth capability on the Noble Homer Ferrington. The conversions of these
rigs will be completed in late 1998 and 1999. The total cost of these six
semisubmersible conversions is expected to be approximately $850,000,000. These
capital expenditures will be funded from operating cash flows, existing cash
balances, available credit facility and lines of credit, and proceeds from both
completed and planned project financings. Proceeds from such project financings
are expected to approximate $400,000,000.
Given the strong demand for deepwater drilling rigs and related
services, increasingly heavy backlogs for equipment and services required to
complete the conversions could constrain the Company's ability to complete the
conversions on a timely basis. The Company has entered into agreements with
several vendors to purchase equipment or for the construction of equipment for
the conversion of units, which agreements generally require non-refundable
payments as certain milestones are met. The amount of such payments totaled
$51,816,000 as of June 30, 1998. As of June 30, 1998, the Company also had
$105,761,000 of purchase commitments with a remaining term in excess of one
year related to rig conversion projects. In the event the Company were to cancel
the purchase commitments, the ultimate amounts refunded would be subject to
negotiation. Certain projects currently being considered by the Company could
require, if they materialize, capital expenditures or other cash requirements
not included in the above estimate. In addition, the Company will continue to
evaluate acquisitions of drilling units from time to time. Factors that could
cause actual capital expenditures to exceed materially the planned capital
expenditures include delays and cost overruns in shipyards, shortages of
equipment, latent damage or deterioration to hull, equipment and machinery in
excess of engineering estimates and assumptions, and changes in design criteria
or specifications during repair or construction.
In May 1997, the Company's Board of Directors authorized the
repurchase of up to 10,000,000 shares of the Company's common stock, or
approximately eight percent of its then outstanding common stock. As of June 30,
1998, the Company had repurchased 2,186,000 shares of common stock at a total
cost of $52,181,000. Additional purchases, if any, would be made from time to
time on the open market or in private transactions at prices determined by the
Company.
17
<PAGE> 18
FORM 10-Q
CREDIT FACILITIES AND LONG-TERM DEBT
The term of the Company's Credit Agreement extends through August 14,
2002. As of June 30, 1998, the Company had an outstanding balance of
$140,000,000 under the Credit Agreement and $3,632,000 had been used to support
outstanding letters of credit. At June 30, 1998, the Company had an additional
line of credit totaling $7,500,000, of which $2,397,000 had been used to support
outstanding letters of credit. Additionally, at June 30, 1998, $21,223,000 of
outstanding letters of credit had been supported through a combination of
unsecured letter of credit facilities and surety bonds. The interest rate on
borrowings under the Credit Agreement was 6.04 percent at June 30, 1998. As of
August 7, 1998, the Company had an outstanding balance of $60,000,000 under the
Credit Agreement.
In July 1998, Noble Drilling (Paul Wolff) Ltd., an indirect, wholly
owned subsidiary of the Company and owner of the Noble Paul Wolff, issued
$145,000,000 principal amount of its fixed rate senior secured notes (the "Wolff
Notes") in three series. The Wolff Notes bear interest at rates of 6.43 percent
to 6.55 percent per annum. One series of the Wolff Notes matures on December 1,
2001 and the other two series mature on December 1, 2004. Principal and interest
payments are payable quarterly on the first day of September, December, March
and June except that the first two quarterly payments (and the quarterly
payments thereafter through September 1, 2001 in the case of one series) are
interest only. The Wolff Notes are guaranteed by Noble Drilling and are secured
by a first mortgage on the Noble Paul Wolff and, until completion of its
conversion to an EVA-4000(TM) semisubmersible, a first mortgage on the Noble
Roger Eason and Noble Leo Segerius. The Wolff Notes can be prepaid, in whole or
in part, at a premium at any time after June 1, 2001.
The Company believes that its cash and cash equivalents, cash generated
from operations, borrowings under its lines of credit and access to other
financing sources will be adequate to meet its anticipated short-term and
long-term liquidity requirements, including scheduled debt repayments.
FINANCIAL INSTRUMENTS
The Company occasionally uses financial instruments to hedge against
its exposure to changes in foreign currencies and interest rates. Management
believes that the Company's hedging activities do not expose the Company to any
material interest rate risk, foreign currency exchange rate risk, commodity
price risk or any other market rate or price risk. Although these hedging
arrangements expose the Company to credit risk, the Company monitors the credit
worthiness of its counterparties, which generally are major institutions, and
believes that losses from nonperformance are unlikely to occur.
The fair value of the Company's long-term debt at June 30, 1998, was
$142,609,000 based on the quoted market prices for similar issues or on the
current rates offered to the Company for debt of similar remaining maturities.
FOREIGN CURRENCY RISK
The Company operates internationally, resulting in exposure to foreign
currency risk. The Company predominantly denominates its contracts in U.S.
Dollars to mitigate the exposure to fluctuations in foreign currencies. The
Company periodically uses foreign exchange derivative instruments or spot
purchases to hedge its known liabilities in foreign currencies to reduce the
impact of foreign currency gains and losses in its financial results. The
Company does not enter into derivative transactions for speculative purposes.
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments that do not qualify as hedges for accounting purposes are recognized
currently based on the change in the market value of the derivative instrument.
During the six-month period ended June 30, 1998, the Company entered into
various foreign currency exchange contracts. These contracts expire monthly
throughout the remainder of 1998 and require the Company to exchange U.S.
Dollars for Dutch Guilders and British Pounds Sterling totaling $12,000,000 and
$17,000,000, respectively. There were no material gains or losses recognized
during the three-month and six-month
18
<PAGE> 19
FORM 10-Q
periods ended June 30, 1998. At June 30, 1998 there were no material unrealized
gains or losses on open foreign exchange derivative hedges. The Company did not
utilize foreign exchange derivative instruments in 1997.
INTEREST RATE RISK
In connection with project financing the Company is seeking to obtain
for the Noble Paul Romano conversion, on June 24, 1998, the Company entered into
an interest rate swap contract with a notional amount of $137,750,000 to
minimize the Company's exposure to interest rate increases during the period
from June 24, 1998 to September 15, 1998, the termination date of the interest
rate swap contract. The market value of the swap will be calculated on the
termination date and the differential paid or received under the contract will
be recognized over the term of the financing as an adjustment to the effective
yield of the underlying financial instrument.
YEAR 2000
In 1996, the Company began implementation of a major computer software
conversion for its management and accounting information systems. The new
system is generally considered to be year 2000 compliant; however, the Company
uses other systems, which have not yet been reviewed adequately to determine
whether or not they will function properly in the year 2000. The Company has
commenced a project to assess all remaining systems for year 2000 compliance.
The Company expects its year 2000 assessment to be completed on a timely basis
and has initiated formal communication with its significant suppliers,
customers and business partners to determine the extent to which the Company is
vulnerable to these third parties' failure to remedy their own year 2000
issues. The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance, and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software and unanticipated problems identified in the
ongoing compliance review. The Company has limited or no control over the
actions of proprietary software vendors and other entities with which it
interacts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information on foreign currency risk and interest rate risk, see
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Financial Instruments."
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The information required by this Item 6(a) is set forth in the
Index to Exhibits accompanying this quarterly report and is
incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1998.
19
<PAGE> 20
FORM 10-Q
SIGNATURES
Pursuant to the requirements 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.
NOBLE DRILLING CORPORATION
DATE: August 14, 1998 /S/ JAMES C. DAY
--------------------------------------
JAMES C. DAY, Chairman, President and
Chief Executive Officer
DATE: August 14, 1998 /S/ BYRON L. WELLIVER
--------------------------------------
BYRON L. WELLIVER,
Senior Vice President-Finance,
Treasurer and Controller
(Principal Financial and Accounting
Officer)
20
<PAGE> 21
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
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0
0
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</TABLE>
