<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 September 30, 1999
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 November 10, 1999:
131,438,719
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amount)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 149,434 $ 211,012
Restricted cash .............................................. 3,974 5,871
Accounts receivable (net allowance of $414 and $610) ......... 137,671 148,168
Costs of uncompleted contracts in excess of billings ......... 2,894 907
Inventories .................................................. 4,742 5,133
Prepaid expenses ............................................. 21,152 21,607
Other current assets ......................................... 9,360 45,511
------------ ------------
Total current assets ........................................... 329,227 438,209
------------ ------------
PROPERTY AND EQUIPMENT
Drilling equipment and facilities ............................ 2,353,415 1,940,919
Other ........................................................ 28,220 27,195
------------ ------------
2,381,635 1,968,114
Accumulated depreciation ..................................... (372,423) (318,981)
------------ ------------
2,009,212 1,649,133
------------ ------------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES .................. 29,065 48,270
DEFERRED INCOME TAXES .......................................... 964 964
OTHER ASSETS ................................................... 64,981 42,056
------------ ------------
$ 2,433,449 $ 2,178,632
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current installments of long-term debt ... $ 59,905 $ 148,786
Accounts payable ............................................. 78,921 78,880
Accrued payroll and related costs ............................ 33,274 21,985
Taxes payable ................................................ 46,946 51,495
Interest payable ............................................. 4,995 6,191
Other current liabilities .................................... 25,126 42,152
------------ ------------
Total current liabilities ...................................... 249,167 349,489
LONG-TERM DEBT ................................................. 747,616 460,842
DEFERRED INCOME TAXES .......................................... 73,342 56,937
OTHER LIABILITIES .............................................. 1,465 891
MINORITY INTEREST .............................................. (2,683) --
------------ ------------
1,068,907 868,159
SHAREHOLDERS' EQUITY
Common stock- par value $0.10 ................................ 13,444 13,376
Capital in excess of par value ............................... 946,146 943,122
Retained earnings ............................................ 485,985 418,024
Treasury stock, at cost ...................................... (69,675) (61,771)
Restricted stock (unearned compensation) ..................... (2,801) --
Accumulated other comprehensive income ....................... (8,557) (2,278)
------------ ------------
1,364,542 1,310,473
------------ ------------
COMMITMENTS AND CONTINGENCIES .................................. -- --
------------ ------------
$ 2,433,449 $ 2,178,632
============ ============
</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 SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services .............................. $ 146,597 $ 145,169
Labor contract drilling services ........................ 7,916 15,238
Turnkey drilling services ............................... 21,095 32,869
Engineering and consulting services ..................... 220 260
Other revenue ........................................... 997 1,513
------------ ------------
176,825 195,049
------------ ------------
OPERATING COSTS AND EXPENSES
Contract drilling services .............................. 77,113 67,376
Labor contract drilling services ........................ 6,716 13,234
Turnkey drilling services ............................... 19,626 38,836
Engineering and consulting services ..................... 190 600
Other expense ........................................... 350 1,029
Depreciation and amortization ........................... 24,119 17,813
Selling, general and administrative ..................... 7,637 7,760
Minority interest ....................................... (126) --
------------ ------------
135,625 146,648
------------ ------------
OPERATING INCOME ........................................... 41,200 48,401
OTHER INCOME (EXPENSE)
Interest expense ........................................ (10,284) (1,160)
Interest income ......................................... 2,338 1,842
Other, net .............................................. 758 (1,910)
------------ ------------
INCOME BEFORE INCOME TAXES ................................. 34,012 47,173
INCOME TAX PROVISION ....................................... (8,842) (14,557)
------------ ------------
NET INCOME ................................................. $ 25,170 $ 32,616
============ ============
EARNINGS PER SHARE:
Basic .................................................... $ 0.19 $ 0.25
Diluted .................................................. $ 0.19 $ 0.25
</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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services .............................. $ 437,606 $ 450,740
Labor contract drilling services ........................ 28,653 49,772
Turnkey drilling services ............................... 61,170 92,717
Engineering and consulting services ..................... 947 1,466
Other revenue ........................................... 4,040 5,618
------------ ------------
532,416 600,313
------------ ------------
OPERATING COSTS AND EXPENSES
Contract drilling services .............................. 233,732 195,607
Labor contract drilling services ........................ 25,142 40,627
Turnkey drilling services ............................... 62,695 96,562
Engineering and consulting services ..................... 845 1,669
Other expense ........................................... 1,596 3,035
Depreciation and amortization ........................... 63,993 53,453
Selling, general and administrative ..................... 23,255 24,339
Minority interest ....................................... (960) --
------------ ------------
410,298 415,292
------------ ------------
OPERATING INCOME ........................................... 122,118 185,021
OTHER INCOME (EXPENSE)
Interest expense ........................................ (22,541) (3,402)
Interest income ......................................... 7,819 4,919
Other, net .............................................. 71 (104)
------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE ........ 107,467 186,434
INCOME TAX PROVISION ....................................... (28,673) (57,185)
------------ ------------
INCOME BEFORE EXTRAORDINARY CHARGE ......................... 78,794 129,249
EXTRAORDINARY CHARGE, NET OF TAX ........................... (10,833) --
------------ ------------
NET INCOME ................................................. $ 67,961 $ 129,249
============ ============
EARNINGS PER SHARE-BASIC:
Income before extraordinary charge ....................... $ 0.60 $ 0.99
Extraordinary charge ..................................... (0.08) --
------------ ------------
Net income per common share .............................. $ 0.52 $ 0.99
============ ============
EARNINGS PER SHARE-DILUTED:
Income before extraordinary charge ....................... $ 0.59 $ 0.98
Extraordinary charge ..................................... (0.08) --
------------ ------------
Net income per common share .............................. $ 0.51 $ 0.98
============ ============
</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 SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
NET INCOME ..................................................................... $ 25,170 $ 32,616
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments ..................................... (373) 256
Unrealized holding losses arising during period .............................. (4,499) --
------------ ------------
Other comprehensive (loss) income ............................................ (4,872) 256
------------ ------------
COMPREHENSIVE INCOME ........................................................... $ 20,298 $ 32,872
============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
NET INCOME ..................................................................... $ 67,961 $ 129,249
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments .................................... (481) 200
------------ ------------
Unrealized (losses) gains on securities:
Unrealized holding losses arising during period ........................... (5,798) (20)
Less: reclassification adjustment for gains realized in net income ........ -- 4
------------ ------------
Net unrealized losses ..................................................... (5,798) (16)
------------ ------------
Other comprehensive (loss) income ........................................... (6,279) 184
------------ ------------
COMPREHENSIVE INCOME ........................................................... $ 61,682 $ 129,433
============ ============
</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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................... $ 67,961 $ 129,249
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 63,993 53,453
Deferred income tax provision ............................. 16,405 12,358
Gain on sales of property and equipment ................... (774) --
Extraordinary charge, net of tax .......................... 10,833 --
Equity in net income of unconsolidated joint ventures ..... 451 1,806
Other ..................................................... 303 (958)
Changes in current assets and liabilities:
Accounts receivable ...................................... 9,514 (7,879)
Other assets ............................................. 33,902 (6,594)
Accounts payable ......................................... (7,041) 14,773
Other liabilities ........................................ (6,414) 39,483
------------ ------------
Net cash provided by operating activities ................ 189,133 235,691
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................. (352,890) (423,790)
Proceeds from sale of property and equipment ................... 1,009 1,943
Investment in and notes receivable from affiliates ............. -- (29,925)
(Investment in) proceeds from sale of marketable securities .... (8,192) 16,455
------------ ------------
Net cash used by investing activities .................... (360,073) (435,317)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ....................... 396,731 144,399
Net (payments) borrowings on revolving credit facility ......... (100,000) 60,000
Payment of long-term debt ...................................... (189,778) (9,013)
Issuance of common stock ....................................... 512 1,751
Decrease in restricted cash .................................... 1,897 --
Purchase of shares returned to treasury ........................ -- (4,313)
------------ ------------
Net cash provided by financing activities ................ 109,362 192,824
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS ............................ (61,578) (6,802)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 211,012 49,917
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 149,434 $ 43,115
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE> 7
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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", "we", "our"
and words of similar import), 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 interim
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, 1998.
Noble Drilling (Paul Romano) Inc. was formed on April 3, 1998 for the
purpose of owning the Noble Paul Romano and financing its conversion to an
EVA-4000(TM) semisubmersible. Noble Drilling (Paul Romano) Inc. is an indirect,
wholly owned subsidiary of Noble Drilling and is operated in a fashion that is
intended to ensure that its assets and liabilities are distinct and separate
from those of the Company and its affiliates and that the creditors of Noble
Drilling (Paul Romano) Inc. would be entitled to satisfy their claims from the
assets of Noble Drilling (Paul Romano) Inc. prior to any distribution to the
Company or its affiliates.
Certain reclassifications have been made in prior year condensed
consolidated financial statements to conform to the classifications used in the
1999 condensed consolidated financial statements. These reclassifications have
no impact on net income.
NOTE 2 - EARNINGS PER SHARE
The following table reconciles the basic and diluted earnings per
share computations for income before extraordinary charge for the three and nine
month periods ended September 30, 1999 and 1998 (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:
SEPTEMBER 30, 1999 $ 25,170 131,679 $ 0.19 132,961 $ 0.19
SEPTEMBER 30, 1998 $ 32,616 131,302 $ 0.25 131,736 $ 0.25
NINE MONTHS ENDED:
SEPTEMBER 30, 1999 $ 78,794 131,391 $ 0.60 132,391 $ 0.59
SEPTEMBER 30, 1998 $129,249 131,195 $ 0.99 132,234 $ 0.98
</TABLE>
Included in diluted shares are common stock equivalents relating to
outstanding stock options of 1,282,000 shares and 434,000 shares for the three
month periods ended September 30, 1999 and 1998, respectively, and 1,000,000
shares and 1,039,000 shares for the nine month periods ended September 30, 1999
and 1998, respectively.
NOTE 3 - MARKETABLE EQUITY SECURITIES
Our investments in marketable equity securities are classified as
available for sale and stated at fair market value under the provisions of SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, any unrealized gains and losses, net of taxes, are included in
"Accumulated other comprehensive income" in the accompanying Condensed
Consolidated Balance Sheets. As of September 30, 1999, the fair market value of
available for sale equity securities totaled $4,931,000, with gross unrealized
losses of $5,798,000. Available for sale equity securities are included in
"Other assets" in the accompanying Condensed Consolidated Balance Sheets.
7
<PAGE> 8
NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Effective January 1, 1999, we acquired a majority interest in Arktik
Drilling Limited, Inc. ("Arktik") and a 100 percent interest in the bareboat
charter of the Noble Kolskaya, in exchange for a variable rate note to Kvaerner
Maritime A.S. ("Kvaerner") in the aggregate principal amount of $17,500,000 (the
"Kvaerner Debt"). (See Note 6). Arktik's principal asset is the drillship, the
Noble Muravlenko. As a result of these acquisitions, the results of operations
of Arktik and the Noble Kolskaya are included in our Consolidated Statements of
Operations from January 1, 1999, and at that date, the respective assets and
liabilities were recorded at their estimated fair values. Prior to January 1,
1999, the investments were accounted for under the equity method. The results of
operations of Arktik and the Noble Kolskaya prior to January 1, 1999 were not
material to our consolidated amounts; therefore, pro forma financial information
is not presented.
NOTE 5 - CREDIT FACILITIES
We have an unsecured revolving credit facility in the amount of
$200,000,000 (the "Credit Agreement"), including a letter of credit facility
totaling $40,000,000 through August 14, 2002. As of September 30, 1999, we had
no outstanding borrowings under the Credit Agreement and $3,677,000 had been
used to support outstanding letters of credit. As of September 30, 1999,
$196,323,000 remained available under the Credit Agreement. Additionally, at
September 30, 1999, we had $21,192,000 of surety bonds and unsecured letter of
credit facilities.
NOTE 6 - LONG-TERM DEBT
On March 16, 1999, we issued $150,000,000 principal amount of our 6.95%
Senior Notes due 2009 (the "2009 Notes") and $250,000,000 principal amount of
our 7.50% Senior Notes due 2019 (the "2019 Notes" and, together with the 2009
Notes, the "Notes"). Interest on the Notes is payable on March 15 and September
15 of each year beginning September 15, 1999. The Notes are redeemable, as a
whole or from time to time in part, at our option on any date prior to maturity
at prices equal to 100 percent of the outstanding principal amount of the Notes
redeemed plus accrued interest to the redemption date plus a make-whole premium,
if any is required to be paid. The Notes are senior unsecured obligations and
the indenture governing the Notes contains covenants that, among other things,
limit our ability to create certain liens, engage in certain sale and lease-back
transactions and merge, consolidate and sell assets, except under certain
conditions.
In March 1999, we used approximately $143,000,000 of the net proceeds
from the issuance of the Notes to purchase and retire $125,000,000 principal
amount of our 9 1/8% Senior Notes due 2006, which resulted in an extraordinary
charge of $10,833,000, net of taxes of $5,833,000, in the first quarter of 1999.
The extraordinary charge represented the difference between the acquisition
price and the net carrying value of the retired notes, including unamortized
debt issuance costs.
In connection with the acquisitions regarding Arktik and the Noble
Kolskaya (see Note 4), we incurred the Kvaerner Debt. Additionally, we recorded
Arktik's outstanding bank indebtedness in the amount of $24,000,000 (the "Arktik
Debt") and Arktik's indebtedness to a minority equity owner in Arktik in the
amount of $7,900,000 (the "Shareholder Debt"). The Arktik Debt and the
Shareholder Debt are non-recourse except to Arktik. The Arktik Debt is secured
by a preferred mortgage on Arktik's drillship, the Noble Muravlenko. The
Shareholder Debt is also secured by a mortgage on the Noble Muravlenko.
The Kvaerner Debt bears interest at a rate equal to the LIBOR rate plus
1.25 percent. Principal and interest is payable on each April 1 and October 1
through maturity on October 1, 2003. We may prepay all or any portion of the
balance, plus accrued interest, at any time after December 31, 1999. The
interest rate as of September 30, 1999 was 6.31 percent per annum.
The Arktik Debt bears interest at a rate equal to the LIBOR rate plus
1.0 percent. Principal and interest is payable by Arktik on each June 1 and
December 1 through maturity on June 1, 2003. Scheduled principal payments are
$4,000,000 for the years 1999 through 2002 and $8,000,000 in 2003. The interest
rate as of September 30, 1999 was 6.19 percent per annum.
The Shareholder Debt bears interest at 12.0 percent per annum. Interest
is payable on each April 1 and October 1. The principal balance of the debt is
to be repaid by Arktik over a three year period, beginning in 2009.
8
<PAGE> 9
NOTE 7 - COMMITMENTS AND CONTINGENCIES
We have entered into agreements with vendors to purchase or construct
equipment for the conversion of rigs. These agreements generally require
non-refundable payments as certain milestones are met. The cumulative amount of
such payments totaled $186,947,000 as of September 30, 1999. As of September 30,
1999, we also had $30,567,000 of purchase commitments related to rig conversion
projects. In the event we were to cancel the purchase commitments, the ultimate
amounts refunded to us would be subject to negotiation with vendors.
NOTE 8 - SEGMENT AND RELATED INFORMATION
We adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in 1998, which changes the way we report information
about our operating segments.
We provide diversified services to the oil and gas industry. Our
reportable segments consist of the primary services we provide. These services
include offshore contract drilling, turnkey drilling and labor contract drilling
services. Although each of these services is generally influenced by the same
economic factors, they each represent a distinct service to the oil and gas
industry. Offshore contract drilling services is then separated into
international and domestic contract drilling segments since there are certain
economic and political risks associated with each of these geographic markets
and our management makes decisions based on these markets accordingly.
Our international contract drilling segment conducts contract drilling
services in the North Sea, Africa, Brazil, the Middle East and Mexico, whereas
our domestic contract drilling is conducted in the U.S. Gulf of Mexico. Our
turnkey drilling operations consist of our coordination of all equipment,
materials, services and management to drill a well to a specified depth for a
fixed price. Our turnkey drilling operations are conducted primarily in the U.S.
Gulf of Mexico. Under our labor contracts, we provide the personnel necessary to
manage and perform drilling operations from drilling platforms owned by the
operator. Our labor contract drilling services are conducted in the U.K. North
Sea and off the east coast of Canada.
All intersegment sales pricing is based on current market conditions.
We evaluate the performance of our operating segments based on operating
revenues and earnings. Summarized financial information of our reportable
segments for the three and nine months ended September 30, 1999 and 1998 is
shown in the following table (in thousands). The "Other" column consists of
results of other insignificant operations and corporate related items.
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC LABOR
THREE MONTHS ENDED: CONTRACT CONTRACT CONTRACT TURNKEY
- ------------------- DRILLING DRILLING DRILLING DRILLING
SEPTEMBER 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL
- ------------------- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers ......... $ 100,294 $ 46,593 $ 8,730 $ 21,095 $ 113 $ 176,825
Intersegment revenues .................... -- -- -- -- -- --
Segment profit (loss) .................... 16,767 6,668 1,826 760 (850) 25,171
Total assets at September 30, 1999 (1) ... 1,156,761 1,056,504 26,227 8,266 185,691 2,433,449
SEPTEMBER 30, 1998:
- -------------------
Revenues from external customers ......... $ 122,040 $ 23,672 $ 16,477 $ 32,868 $ (8) $ 195,049
Intersegment revenues .................... -- (51) -- -- -- (51)
Segment profit (loss) (2) ................ 38,600 3,237 207 (4,414) (5,018) 32,612
</TABLE>
- ---------------
(1) Total assets - Other at September 30, 1999 includes cash and cash
equivalents of $127,348,000.
(2) Segment loss - Other for the three months ended September 30, 1998
includes tax expense of $7,971,000 for intercompany domestic rig leases
to international areas, revenues from which are included in U.S.
taxable income.
9
<PAGE> 10
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC LABOR
NINE MONTHS ENDED: CONTRACT CONTRACT CONTRACT TURNKEY
- ------------------- DRILLING DRILLING DRILLING DRILLING
SEPTEMBER 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL
- ------------------- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers ... $345,019 $ 93,668 $ 32,237 $ 61,170 $ 322 $532,416
Intersegment revenues .............. -- 1,305 -- -- -- 1,305
Segment profit (loss) .............. 77,462 2,453 4,445 (2,468) (3,125) 78,767
SEPTEMBER 30, 1998:
- -------------------
Revenues from external customers ... $346,522 $105,771 $ 54,477 $ 93,543 $ -- $600,313
Intersegment revenues .............. 873 2,242 -- 135 -- 3,250
Segment profit (loss) .............. 100,017 35,013 6,147 (4,026) (7,906) 129,245
</TABLE>
The following table is a reconciliation of reportable segment profit
or loss to our consolidated totals for the three and nine months ended
September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Total profit for reportable segments ....................... $ 25,171 $ 32,612
Elimination of intersegment (profits) losses ............... (1) 4
---------- ----------
Total consolidated net income ..................... $ 25,170 $ 32,616
========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total profit for reportable segments ....................... $ 78,767 $ 129,245
Elimination of intersegment losses ......................... 27 4
Extraordinary charge, net of tax ........................... (10,833) --
---------- ----------
Total consolidated net income ..................... $ 67,961 $ 129,249
========== ==========
</TABLE>
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 and Section 21E of the
Securities Exchange Act of 1934. 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 our financial position, business
strategy, plans and objectives of our management for future operations, industry
conditions, and indebtedness covenant compliance, are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we cannot be certain that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include, but are not
limited to, volatility in crude oil and natural gas prices, potential
deterioration in the demand for our drilling services and resulting declining
dayrates, the cancellation by our customers of drilling contracts or letter
agreements or letters of intent for drilling contracts or their exercise of
early termination provisions generally found in our drilling contracts, risks
associated with our turnkey drilling operations, intense competition in the
drilling industry, heavy demand for the equipment and services that we need in
order to finish our major shipyard refurbishment and conversion projects on
schedule and on budget, political and economic conditions in international
markets where we operate, adverse weather (such as hurricanes) and seas,
operational risks (such as blowouts, fires and loss of production), limitations
on our insurance coverage, and requirements and potential liability imposed by
governmental regulation of the drilling industry (including environmental
regulation).
As used herein, unless otherwise required by the context, the term
"Noble Drilling" refers to Noble Drilling Corporation and the terms "we" "our"
and similar words refer to Noble Drilling and its consolidated subsidiaries. The
use herein of such terms as group, organization, we, us, our and its, or
references to specific entities, is not intended to be a precise description of
corporate relationships.
10
<PAGE> 11
THE COMPANY
We are a leading provider of diversified services for the oil and gas
industry. Contract drilling services are performed with our fleet of 47 offshore
drilling units located in key markets worldwide. Our fleet of floating deepwater
units consists of nine semisubmersibles and three dynamically positioned
drillships, seven of which are designed to operate in water depths greater than
5,000 feet. Our fleet of 32 jackup rigs includes 19 premium units that operate
in water depths of 300 feet and greater, four of which operate in water depths
of 360 feet and greater. In addition, our fleet includes three submersible
drilling units. Ten of our drilling units are capable of operating in harsh
environments. Over 60 percent of the fleet is currently deployed in
international markets, principally including the North Sea, Africa, Brazil, the
Middle East and Mexico. We also provide labor contract drilling services,
turnkey drilling services and engineering and production management services.
Demand for drilling services depends on a variety of economic and
political factors, including worldwide demand for oil and gas, the ability of
the Organization of Petroleum Exporting Countries ("OPEC") to set and maintain
production levels and pricing, the level of production of non-OPEC countries and
the policies of the various governments regarding exploration and development of
their oil and gas reserves.
Since January 1999, oil prices have increased significantly as a result
of OPEC productions cuts, decreased oil supply due to low levels of drilling and
the beginnings of Asian economic recovery which has contributed to rising global
oil demand projections. Natural gas prices in the U. S. have also increased in
anticipation of tighter supplies. Current drilling activity in many
international markets continues to remain weak, although the Gulf of Mexico
jackup market is showing positive signs of improvement in the form of improved
utilization, particularly for the higher-end equipment, and higher dayrates. The
strengthening demand for jackups in the U. S. Gulf of Mexico could be adversely
impacted by jackups mobilized back to the Gulf of Mexico from weak international
markets. Oil companies continue to work through the effects of industry
consolidation, which have inhibited capital spending on exploration and
development this year. Further consolidation among our customer base would be
expected to dampen drilling activity levels near-term.
In recent years, we have focused on increasing the number of rigs in
our fleet capable of deepwater offshore drilling. We have incorporated this
focus into our broader, long-standing business strategy to actively expand our
international and offshore deepwater capabilities through acquisitions, rig
upgrades and modifications and to redeploy assets in important geological areas.
A principal component of our deepwater strategy is our EVA-4000(TM)
semisubmersible conversion program. The EVA-4000(TM) is our proprietary design
by which we convert our three-column submersible drilling rigs into
ultra-deepwater semisubmersibles at a lower cost and on an accelerated delivery
schedule, we believe, versus a new construction project. Four of our five
EVA-4000(TM) semisubmersibles have been delivered under long-term contracts. The
Noble Paul Romano, Noble Paul Wolff, Noble Jim Thompson and Noble Amos Runner
were activated in December 1998, May 1999, June 1999 and August 1999,
respectively. The fifth EVA-4000(TM), the Noble Max Smith, is scheduled for
delivery in December 1999. In addition, the Noble Homer Ferrington is being
upgraded and is scheduled for delivery in the first quarter of 2000.
The Noble Paul Romano, which is capable of drilling in 6,000 feet of
water, is contracted to Shell Deepwater Development Inc. ("Shell Deepwater"), an
affiliate of Shell Oil Company, for use in the U.S. Gulf of Mexico under a five
year contract scheduled to expire in December 2003. The Noble Paul Wolff, a
dynamically positioned unit capable of drilling in 8,900 feet of water, is
contracted to Petroleo Brasiliero S.A. ("Petrobras") for use offshore Brazil
under a six year contract scheduled to expire in May 2005. The Noble Jim
Thompson, which is capable of drilling in 6,000 feet of water, is contracted to
Shell Deepwater for use in the U.S. Gulf of Mexico for an initial term of three
years scheduled to expire in July 2002, with options to extend by Shell
Deepwater. The Noble Amos Runner, which is capable of drilling in 6,600 feet of
water, is under contract to a rig-sharing consortium of operators for use in the
U.S. Gulf of Mexico under a five year contract scheduled to expire in August
2004.
11
<PAGE> 12
We have entered into a drilling contract with Amerada Hess Corporation
for use of the Noble Max Smith in the U. S. Gulf of Mexico for 30 months out of
a five-year contract period. We continue to work with Union Pacific Resources
Corporation under its letter of intent with us to finalize the terms and
conditions of its use of the unit during the balance of the five-year period.
Union Pacific has expressed to us its desire to contract the unit for less than
the remaining 30 month portion of the five-year period and at a lower dayrate
than is provided for in its letter of intent. The unit is scheduled for delivery
in December 1999. Inability to contract the unit during the off-times not used
by Amerada Hess over the five-year contract term, whether in the spot market or
pursuant to a long-term contract, at the dayrate specified in the letter of
intent with Union Pacific would adversely affect our future revenues and
operating income during the relevant time periods. In the absence of achieving
an acceptable outcome, we plan to pursue the performance by Union Pacific
Resources Corporation of its commitment under the terms and conditions of its
letter of intent. The Noble Homer Ferrington remains subject to the letter
agreements dated February 1998 with Mariner Energy, Inc. and Samedan Oil
Corporation for a five-year drilling contract and related rig sharing agreement.
As previously disclosed, Mariner expressed its view in March 1999 that its
letter agreement had expired, and further expressed its intention to work toward
a mutually acceptable outcome because Mariner still needs access to such a
deepwater rig. As previously disclosed, Samedan has questioned the extent of its
obligations under its letter agreement, particularly if Mariner defaults on its
commitment under its letter agreement. Samedan has also informed us that it has
concerns about the rig's design criteria. We believe these operators have a
binding commitment to utilize this unit, and we will continue to work with both
operators to attempt to achieve a mutually acceptable outcome. In the absence of
such an outcome, we plan to pursue the performance by such parties of their
commitments under the terms and conditions of their respective letter
agreements. The rig, which will be capable of drilling in 6,000 feet of water,
is scheduled for delivery in the first quarter of 2000. If we are unable to
finalize the contracts covering the Noble Homer Ferrington, we could experience
delays in finding alternate customers. Failure or delay in contracting the unit
under terms as favorable to us as those reflected in the existing letter
agreements would adversely affect our future revenues and operating income.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL
Net income for the third quarter of 1999 (the "Current Quarter") was
$25,170,000, or $0.19 per diluted share, on operating revenues of $176,825,000,
compared to net income for the third quarter of 1998 (the "Comparable Quarter")
of $32,616,000, or $0.25 per diluted share, on operating revenues of
$195,049,000.
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average dayrate for our rig fleet for the three months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE
-------------------- ------------------- ----------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------- ----------------------
1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
International......... 64% 89% 1,728 2,283 $ 58,029 $ 53,243
Domestic.............. 72% 64% 893 571 $ 51,873 $ 41,357
</TABLE>
- ---------------------
(1) Information reflects our policy to report utilization rates based on
the number of actively marketed rigs in our fleet.
12
<PAGE> 13
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for our international operations for the three months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
---------------------------- ---------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services....................... $ 100,274 $ 121,554 $ 44,221 $ 64,004
Labor contract drilling services................. 7,916 15,238 1,200 2,004
Turnkey drilling services........................ - 23,449 (109) 136
Engineering and consulting services.............. 220 260 30 (340)
Other............................................ 614 1,465 436 690
------------ ------------ ----------- -----------
Total................................... $ 109,024 $ 161,966 $ 45,778 $ 66,494
============ ============ =========== ===========
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
decreased $21,280,000 in the Current Quarter as compared to the Comparable
Quarter primarily due to lower average rig utilization rates and operating days.
The geographic locations affected the most by decreased average rig utilization
were Africa, Mexico and the Middle East. The decrease in utilization was
partially offset by higher average international dayrates in the Current Quarter
resulting from certain contract renewals in the North Sea and the consolidation
of the results of operations effective January 1, 1999 of Arktik Drilling
Limited, Inc. ("Arktik") and the Noble Kolskaya. See Note 4 to our accompanying
Condensed Consolidated Financial Statements. Additionally, the Noble Paul Wolff,
an EVA-4000TM semisubmersible, began operating in Brazil for Petrobras in May
1999 at a dayrate that is above our average dayrate. Labor contract drilling
services revenues decreased $7,322,000 in the Current Quarter as compared to the
Comparable Quarter due to fewer operating days on the North Sea labor contracts
as a result of the expiration of certain contracts that were not renewed coupled
with reduced drilling and workover activities by our customers. We did not
generate any international turnkey drilling services revenues in the Current
Quarter compared to $23,449,000 in the Comparable Quarter. There were no
international turnkey well completions in the Current Quarter compared to one in
Mexico in the Comparable Quarter.
GROSS MARGIN. International contract drilling services gross margin
decreased $19,783,000 in the Current Quarter as compared to the Comparable
Quarter primarily due to lower average rig utilization rates and operating days
combined with certain ongoing operating expenses incurred on rigs that were
stacked during the Current Quarter. Labor contract drilling services gross
margin decreased $804,000 in the Current Quarter as compared to the Comparable
Quarter primarily due to fewer operating days on the North Sea labor contracts
coupled with reduced drilling and workover activities by our customers.
DOMESTIC OPERATIONS
The following table sets forth the operating revenues and gross margin
for our domestic operations for the three months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
-------------------------------- --------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ..................... $ 46,323 $ 23,615 $ 25,263 $ 13,789
Turnkey drilling services ...................... 21,095 9,420 1,578 (6,103)
Other .......................................... 383 48 211 (206)
------------ ------------ ------------ ------------
Total ................................. $ 67,801 $ 33,083 $ 27,052 $ 7,480
============ ============ ============ ============
</TABLE>
13
<PAGE> 14
OPERATING REVENUES. Domestic contract drilling services revenues
increased $22,708,000 in the Current Quarter as compared to the Comparable
Quarter due to higher average rig utilization rates, operating days and average
dayrate. The higher average dayrate was primarily related to the operations of
the Noble Paul Romano, Noble Jim Thompson and Noble Amos Runner EVA-4000(TM)
semisubmersibles at dayrates that are above our average dayrate, partially
offset by lower average dayrates on our domestic jackup rigs. The Noble Paul
Romano, Noble Jim Thompson and Noble Amos Runner began operating in December
1998, June 1999 and August 1999, respectively. Domestic turnkey drilling
services revenues increased $11,675,000 in the Current Quarter as compared to
the Comparable Quarter due to more well completions in the Current Quarter.
There were seven domestic well completions in the Current Quarter compared to
one in the Comparable Quarter.
GROSS MARGIN. Domestic contract drilling services gross margin
increased $11,474,000 in the Current Quarter as compared to the Comparable
Quarter due to higher average rig utilization rates, operating days and average
dayrate. The higher average dayrate was primarily related to the operations of
our EVA-4000(TM) semisubmersibles in the U. S. Gulf of Mexico, partially offset
by lower average dayrates on our domestic jackup rigs. Domestic turnkey drilling
services gross margin increased $7,681,000 in the Current Quarter as compared to
the Comparable Quarter due to additional well completions.
OTHER ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $6,306,000 in the Current Quarter as compared to the
Comparable Quarter due primarily to the activation of four EVA-4000(TM)
semisubmersibles since the latter part of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses were consistent between the Current Quarter and
Comparable Quarter, decreasing by $123,000.
INTEREST EXPENSE. Interest expense increased $9,124,000 in the Current
Quarter as compared to the Comparable Quarter due to higher average debt
balances resulting from project financings completed in the latter part of 1998
related to EVA-4000(TM) semisubmersible conversions and our March 1999 issuance
of $150,000,000 principal amount of 6.95% Senior Notes due 2009 (the "2009
Notes") and $250,000,000 principal amount of 7.50% Senior Notes due 2019 (the
"2019 Notes" and, together with the 2009 Notes, the "Notes"). Additionally, in
connection with the acquisition of a majority interest in Arktik and a 100
percent interest in the bareboat charter of the Noble Kolskaya, we incurred debt
of $17,500,000 and recorded Arktik's outstanding indebtedness of $31,900,000.
See Notes 4 and 6 to our accompanying Condensed Consolidated Financial
Statements. Capitalized interest costs related to construction in progress on
qualifying upgrade projects were $4,218,000 and $4,892,000 in the Current
Quarter and the Comparable Quarter, respectively.
INTEREST INCOME. Interest income increased $496,000 in the Current
Quarter as compared to the Comparable Quarter due to higher average cash
balances resulting from the completion of project financings in the latter part
of 1998 and the March 1999 issuance of the Notes.
INCOME TAX PROVISION. Income tax expense decreased $5,715,000 in the
Current Quarter as compared to the Comparable Quarter due primarily to lower
pretax earnings.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
GENERAL
Net income for the nine months ended September 30, 1999 (the "Current
Period"), excluding non-recurring items, was $78,794,000, or $0.59 per diluted
share, on operating revenues of $532,416,000, compared to net income of
$129,249,000, or $0.98 per diluted share, on operating revenues of $600,313,000
for the nine months ended September 30, 1998 (the "Comparable Period").
Results of the Current Period included an extraordinary charge of
$10,833,000, net of taxes of $5,833,000, related to our purchase and retirement
of $125,000,000 principal amount of our 9 1/8% Senior Notes due 2006 (the "9
1/8% Notes") in March 1999. We financed the purchase and retirement of the 9
1/8% Notes with a portion of the net proceeds from the issuance of the Notes.
14
<PAGE> 15
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average dayrate for our rig fleet for the nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE
-------------------- ------------------- -------------------
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
International ................ 76% 89% 5,993 6,825 $ 57,467 $ 50,660
Domestic ..................... 67% 84% 2,290 2,176 $ 40,701 $ 48,247
</TABLE>
- -----------
(1) Information reflects our policy to report utilization rates based on
the number of actively marketed rigs in our fleet.
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for our international operations for the nine months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
-------------------------------- --------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ................. $ 344,401 $ 345,755 $ 162,925 $ 183,389
Labor contract drilling services ........... 28,653 49,772 3,511 9,145
Turnkey drilling services .................. -- 26,912 -- (5,131)
Engineering and consulting services ........ 947 1,466 102 (203)
Other ...................................... 3,255 4,879 2,366 2,270
------------ ------------ ------------ ------------
Total ............................. $ 377,256 $ 428,784 $ 168,904 $ 189,470
============ ============ ============ ============
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
in the Current Period were flat as compared to the Comparable Period with lower
average rig utilization rates and operating days being offset by higher average
dayrates on certain contract renewals in the North Sea. The geographic locations
affected the most by decreased average rig utilization were Africa, Mexico and
the Middle East. The lower utilization in these areas was partially offset by
the consolidation of the results of operations effective January 1, 1999 of
Arktik and the Noble Kolskaya. See Note 4 to our accompanying Condensed
Consolidated Financial Statements. Additionally, the Noble Paul Wolff, an
EVA-4000(TM) semisubmersible, began operating in Brazil for Petrobras in May
1999 at a dayrate that is higher than our average international dayrate. Labor
contract drilling services revenues decreased $21,119,000 in the Current Period
as compared to the Comparable Period due to fewer operating days on the North
Sea labor contracts as a result of the expiration of certain contracts that were
not renewed coupled with reduced drilling and workover activities by our
customers. We did not generate any international turnkey drilling services
revenues in the Current Period as compared to $26,912,000 generated in the
Comparable Period. There were no international turnkey wells completed in the
Current Period compared to one in the Comparable Period.
15
<PAGE> 16
GROSS MARGIN. International contract drilling services gross margin
decreased $20,464,000 in the Current Period as compared to the Comparable Period
primarily due to lower average rig utilization rates and operating days combined
with ongoing operating expenses incurred on rigs that were stacked during the
Current Period. Labor contract drilling services gross margin decreased
$5,634,000 in the Current Period as compared to the Comparable Period primarily
due to fewer operating days on the North Sea labor contracts coupled with
reduced drilling and workover activities by our customers.
DOMESTIC OPERATIONS
The following table sets forth the operating revenues and gross margin
for our domestic operations for the nine months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
-------------------------------- --------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ................... $ 93,205 $ 104,985 $ 40,949 $ 71,744
Turnkey drilling services .................... 61,170 65,805 (1,525) 1,286
Other ........................................ 785 739 78 313
------------ ------------ ------------ ------------
Total ............................... $ 155,160 $ 171,529 $ 39,502 $ 73,343
============ ============ ============ ============
</TABLE>
OPERATING REVENUES. Domestic contract drilling services revenues
decreased $11,780,000 in the Current Period as compared to the Comparable Period
primarily due to lower average dayrates and average rig utilization rates. The
lower average dayrates primarily relate to our domestic jackup rigs and were
partially offset by revenues from the Noble Paul Romano, Noble Jim Thompson and
Noble Amos Runner which began operating in December 1998, June 1999 and August
1999, respectively, and earn dayrates that are higher than our average domestic
rate. Domestic turnkey drilling services revenues were $4,635,000 lower in the
Current Period than the Comparable Period due to lower turnkey rates charged to
our customers and the completion of turnkey wells that were less complex and
thus produced lower average revenues than those wells completed in the
Comparable Period. Nineteen domestic turnkey wells were completed in the Current
Period as compared to nine in the Comparable Period.
GROSS MARGIN. While the operations of the Noble Paul Romano, Noble Jim
Thompson and Noble Amos Runner favorably impacted domestic contract drilling
services gross margin in the Current Period, gross margin decreased $30,795,000
in the Current Period as compared to the Comparable Period due primarily to
lower average dayrates and average rig utilization rates and certain ongoing
operating expenses incurred on rigs that were stacked during the Current Period.
The negative turnkey drilling services gross margin is attributable to above
market dayrates and lower utilization on certain drilling rigs which our turnkey
subsidiary had under term contract from a third party during the Current Period.
OTHER ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $10,540,000 in the Current Period as compared to the
Comparable Period due primarily to the activation of four EVA-4000(TM)
semisubmersibles since the latter part of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased
$1,084,000 in the Current Period as compared to the Comparable Period primarily
due to the implementation of cost reduction initiatives in the Current Period.
16
<PAGE> 17
INTEREST EXPENSE. Interest expense increased $19,139,000 in the Current
Period as compared to the Comparable Period due to higher average debt balances
resulting from project financings completed in the latter part of 1998 related
to EVA-4000(TM) semisubmersible conversions and the March 1999 issuance of the
Notes. Additionally, in connection with the acquisition of a majority interest
in Arktik and a 100 percent interest in the bareboat charter of the Noble
Kolskaya, we incurred debt of $17,500,000 and recorded Arktik's outstanding
indebtedness of $31,900,000. See Notes 4 and 6 to our accompanying Condensed
Consolidated Financial Statements. Capitalized interest costs related to
construction in progress on qualifying upgrade projects were $18,659,000 and
$10,845,000 in the Current Period and the Comparable Period, respectively.
INTEREST INCOME. Interest income increased $2,900,000 in the Current
Period as compared to the Comparable Period due to higher average cash balances
resulting from the completion of project financings in the latter part of 1998
and the March 1999 issuance of the Notes.
INCOME TAX PROVISION. Income tax expense decreased $28,512,000 in the
Current Period as compared to the Comparable Period due primarily to lower
pretax earnings and a lower proportion of our earnings being U.S. sourced
earnings that are taxed at higher effective rates than international earnings.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
At September 30, 1999, we had cash and cash equivalents of $149,434,000
and approximately $196,323,000 of funds available under our line of credit. We
had working capital of $80,060,000 and $88,720,000 at September 30, 1999 and
December 31, 1998, respectively. Total debt as a percentage of total debt plus
shareholders' equity was 37 percent at September 30, 1999 compared to 32 percent
at December 31, 1998.
Capital expenditures totaled $96,837,000 and $352,890,000 for the
Current Quarter and Current Period, respectively. We expect capital expenditures
for the remainder of 1999 to aggregate approximately $92,480,000, of which the
majority relates to conversions and upgrades of drilling units. Of this amount,
approximately $34,000,000 relates to the conversion of the Noble Max Smith and
approximately $57,030,000 relates to the upgrade of the Noble Homer Ferrington.
We expect the total cost of these two semisubmersible projects to be
approximately $334,567,000.
Certain projects we are currently considering could require, if they
materialize, capital expenditures or other cash requirements not included in the
above estimate. In addition, we will continue to evaluate acquisitions of
drilling units from time to time. Other 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 and criteria or specifications
during repair or construction.
We have entered into agreements with vendors to purchase or construct
equipment for the conversion of drilling units. These agreements generally
require non-refundable payments as certain milestones are met. The cumulative
amount of such payments totaled $186,947,000 through September 30, 1999. As of
September 30, 1999, we also had $30,567,000 of purchase commitments related to
rig conversion projects. If we cancelled the purchase commitments, the ultimate
amounts refunded to us would be subject to negotiation with vendors.
CREDIT FACILITIES AND LONG-TERM DEBT
As of September 30, 1999, our short-term debt and current installments
of long-term debt balance was $59,905,000 as compared to $148,786,000 as of
December 31, 1998. As of September 30, 1999, our long-term debt balance was
$747,616,000 as compared to $460,842,000 as of December 31, 1998.
17
<PAGE> 18
On March 16, 1999, we issued our 2009 Notes and 2019 Notes in the
aggregate principal amount of $400,000,000. We used approximately $218,000,000
of the net proceeds from the issuance of the Notes to purchase and retire our
9 1/8% Notes and to repay $75,000,000 outstanding under our Credit Agreement.
See Note 6 to our accompanying Condensed Consolidated Financial Statements.
As of September 30, 1999, we had no borrowings under the Credit
Agreement and $3,677,000 had been used to support outstanding letters of credit.
As of September 30, 1999, we had the ability to borrow $196,323,000 under the
Credit Agreement. Additionally, at September 30, 1999, we had $21,192,000 of
surety bonds and unsecured letter of credit facilities.
In connection with our acquisition effective January 1, 1999 of a
majority interest in Arktik and a 100 percent interest in the bareboat charter
of the Noble Kolskaya, we incurred indebtedness to Kvaerner Maritime A.S. in the
aggregate principal amount of $17,500,000. Additionally, we recorded Arktik's
outstanding bank indebtedness (the "Arktik Debt") in the amount of $24,000,000
and Arktik's indebtedness to a minority equity owner in Arktik in the amount of
$7,900,000. See Note 4 to our accompanying Condensed Consolidated Financial
Statements.
In connection with the Arktik Debt, we have entered into an interest
swap contract with a notional amount of $20,000,000 to minimize our exposure to
interest rate increases during the period from December 1, 1999 to June 2, 2003,
the termination date of the interest rate swap contract. Under the terms of the
swap agreement, on a semi-annual basis we will pay a fixed interest rate of
6.29% per annum plus a 1% margin on the outstanding principal balance. Interest
expense recognized on the Arktik Debt will be at the fixed interest rate plus 1%
margin. See Note 6 to our accompanying Condensed Consolidated Financial
Statements.
Required debt principal and interest payments for currently
outstanding debt are estimated to be approximately $34,188,000 over the
remainder of 1999. We expect to fund these obligations out of existing balances
of cash and cash equivalents as well as cash expected to be provided by
operations. We anticipate that our existing cash balances and our cash flows
generated from operations will be sufficient to meet our required debt principal
and interest payments and our expected discretionary capital expenditures,
assuming no material decrease in demand for contract drilling and turnkey
services.
YEAR 2000
We are working to resolve the potential impact of the year 2000 on the
ability of our computerized systems to accurately process information that may
be date-sensitive. Any of our programs that recognize a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
We are managing our year 2000 compliance issues through a committee (the "Y2K
Committee"), which was formed to develop our year 2000 initiatives. As of
September 30, 1999, the Y2K Committee had completed its review of critical
information technology ("IT") systems, such as computer hardware and software,
and non-information technology ("Non-IT") systems, which include computer
controlled equipment and electronic devices that are used to operate equipment
on our drilling units. Additionally, the review of telephone systems and other
office-based electronic equipment systems has been completed.
The Y2K Committee has also initiated and/or received communication from
most of our customers, suppliers and service providers on year 2000 issues to
determine the extent to which we may be exposed to the disruption of business
activities in the event these third parties fail to correct their year 2000
system deficiencies. Although there is currently no indication that the various
companies on which we primarily rely will not resolve their year 2000 compliance
issues, there can be no guarantee that the systems of such companies will be
corrected on a timely basis. Additionally, there can be no guarantee that we
will not encounter an unexpected year 2000 problem.
The Y2K Committee began implementing corrective measures based on the
internal and external IT and Non-IT systems reviews. However, if we or the third
parties on which we principally rely are unable to finalize corrective measures
in a timely manner, a material adverse impact to our results of operations and
financial position could result. In the event we or the various companies on
which we primarily rely experience year 2000 compliance problems, worst-case
consequences could include the interruption of drilling services aboard our
drilling units, delays in shipments of materials and supplies required to
operate our drilling units, delays in transferring personnel to and from the
drilling units, and delays in receiving funds from customers or in making
payments to suppliers.
18
<PAGE> 19
The year 2000 remediation and testing phases for critical IT systems
have been completely reviewed, remediated and tested. We are developing a
contingency plan for year 2000 issues to address business interruptions. We
expect to have a contingency plan completed by November 30, 1999.
As of September 30, 1999, we had incurred costs of approximately
$185,000 related to our year 2000 project. The estimated additional costs to
complete the project are approximately $65,000. A portion of these costs is not
incremental, but rather reflects redeployment of internal resources from other
activities. We do not separately track the internal costs incurred for the year
2000 project. Such internal costs principally relate to payroll costs of project
personnel. All of the costs of the year 2000 project are being borne out of our
operating cash flow and are expensed as incurred.
ACCOUNTING PRONOUNCEMENT
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, as amended by
SFAS No.137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No.133", is effective for fiscal years
beginning after June 15, 2000. The impact of SFAS 133 on our financial
statements will depend on a variety of factors, including future interpretive
guidance from the FASB, the future level of actual foreign currency
transactions, the extent of our hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. However, we believe
adoption will not have a material effect on our results of operations, cash
flows or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are subject to market risk exposure related to changes in interest
rates on our Credit Agreement and certain variable rate indebtedness. Interest
on these obligations is at an agreed upon percentage point spread from LIBOR. At
September 30, 1999, there were no outstanding borrowings under the Credit
Agreement and $15,750,000 of variable rate obligations was outstanding. Based
upon this balance, an immediate change of one percent in the interest rate would
not cause a material change in interest expense on an annual basis.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business internationally; however, the vast majority of our
foreign transactions are denominated in U.S. dollars. With minor exceptions, we
structure our drilling contracts in U.S. dollars to mitigate the exposure to
fluctuations in foreign currencies. Other than our trade accounts receivable and
trade accounts payable, we do not currently have financial instruments that are
sensitive to foreign currency rates.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In June 1998 the Securities and Exchange Commission amended Rule 14a-4
under the Securities Exchange Act of 1934. The amended rule provides that a
proxy may confer discretionary authority to vote on any matter at an annual
meeting if the company did not have written notice of the matter to be raised at
the annual meeting at least 45 days in advance of the anniversary of the mailing
of proxy materials for the prior year's annual meeting. The rule further
provides that any advance notice provision in a company's bylaws or articles of
incorporation will override the 45-day advance notice provision in the rule. The
bylaws of Noble Drilling provide that notice of any stockholder proposal
nominating persons for election to the Board of Directors of Noble Drilling must
be given to the Secretary of Noble Drilling not later than 90 days prior to the
annual meeting; and all other stockholder proposals must be filed with the
Secretary not less than 60 nor more than 120 days in advance of the date of the
annual meeting.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a stockholder must satisfy in order to have a
stockholder proposal included in Noble Drilling's proxy statement and form of
proxy. As described in
19
<PAGE> 20
Noble Drilling's proxy statement for its 1999 Annual Meeting, specific proposals
of stockholders intended to be presented at the 2000 Annual Meeting must be
received by the Secretary of Noble Drilling no later than November 19, 1999 in
order to be eligible for inclusion in Noble Drilling's proxy materials relating
to that meeting.
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 us during the quarter
ended September 30, 1999.
20
<PAGE> 21
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: November 12, 1999 /s/ ROBERT D. CAMPBELL
---------------------------------------
ROBERT D. CAMPBELL,
President
DATE: November 12, 1999 /s/ BYRON L. WELLIVER
---------------------------------------
BYRON L. WELLIVER,
Senior Vice President-Finance,
Treasurer and Controller
(Principal Financial and Accounting
Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 149,434
<SECURITIES> 0
<RECEIVABLES> 138,085
<ALLOWANCES> 414
<INVENTORY> 4,742
<CURRENT-ASSETS> 329,227
<PP&E> 2,381,635
<DEPRECIATION> 372,423
<TOTAL-ASSETS> 2,433,449
<CURRENT-LIABILITIES> 249,167
<BONDS> 747,616
0
0
<COMMON> 13,444
<OTHER-SE> 1,351,098
<TOTAL-LIABILITY-AND-EQUITY> 2,433,449
<SALES> 0
<TOTAL-REVENUES> 532,416
<CGS> 0
<TOTAL-COSTS> 324,010
<OTHER-EXPENSES> 86,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,541
<INCOME-PRETAX> 107,467
<INCOME-TAX> 28,673
<INCOME-CONTINUING> 78,794
<DISCONTINUED> 0
<EXTRAORDINARY> (10,833)
<CHANGES> 0
<NET-INCOME> 67,961
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
