<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, 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)
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 11, 1999: 131,790,485
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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>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................... $ 205,631 $ 211,012
Restricted cash .............................................. 3,923 5,871
Accounts receivable (net allowance of $519 and $610) ......... 147,558 148,168
Costs of uncompleted contracts in excess of billings ......... 4,824 907
Inventories .................................................. 5,008 5,133
Prepaid expenses ............................................. 24,154 21,607
Other current assets ......................................... 21,337 45,511
----------- -----------
Total current assets ........................................... 412,435 438,209
----------- -----------
PROPERTY AND EQUIPMENT
Drilling equipment and facilities ............................ 2,265,521 1,940,919
Other ........................................................ 27,867 27,195
----------- -----------
2,293,388 1,968,114
Accumulated depreciation ..................................... (356,815) (318,981)
----------- -----------
1,936,573 1,649,133
----------- -----------
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES .................. 29,207 48,270
DEFERRED INCOME TAXES .......................................... 383 964
OTHER ASSETS ................................................... 67,556 42,056
----------- -----------
$ 2,446,154 $ 2,178,632
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current installments of long-term debt ... $ 59,100 $ 148,786
Accounts payable ............................................. 95,166 78,880
Accrued payroll and related costs ............................ 28,612 21,985
Taxes payable ................................................ 38,428 51,495
Interest payable ............................................. 11,362 6,191
Other current liabilities .................................... 28,703 42,152
----------- -----------
Total current liabilities ...................................... 261,371 349,489
LONG-TERM DEBT ................................................. 760,389 460,842
DEFERRED INCOME TAXES .......................................... 73,116 56,937
OTHER LIABILITIES .............................................. 1,177 891
MINORITY INTEREST .............................................. (2,557) --
----------- -----------
1,093,496 868,159
----------- -----------
SHAREHOLDERS' EQUITY
Common stock - par value $0.10 ............................... 13,393 13,376
Capital in excess of par value ............................... 943,131 943,122
Retained earnings ............................................ 460,815 418,024
Treasury stock, at cost ...................................... (57,991) (61,771)
Restricted stock (unearned compensation) ..................... (3,005) --
Accumulated other comprehensive income ....................... (3,685) (2,278)
----------- -----------
1,352,658 1,310,473
----------- -----------
COMMITMENTS AND CONTINGENCIES .................................. -- --
----------- -----------
$ 2,446,154 $ 2,178,632
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
1
<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,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services ........... $ 142,093 $ 158,529
Labor contract drilling services ..... 9,747 16,267
Turnkey drilling services ............ 21,879 39,846
Engineering and consulting services .. 383 522
Other revenue ........................ 1,369 1,064
----------- -----------
175,471 216,228
----------- -----------
OPERATING COSTS AND EXPENSES
Contract drilling services ........... 73,909 67,318
Labor contract drilling services ..... 8,616 13,684
Turnkey drilling services ............ 22,107 37,287
Engineering and consulting services .. 357 431
Other expense ........................ 1,734 634
Depreciation and amortization ........ 20,781 18,155
Selling, general and administrative .. 6,234 8,414
Minority interest .................... (254) --
----------- -----------
133,484 145,923
----------- -----------
OPERATING INCOME ........................ 41,987 70,305
OTHER INCOME (EXPENSE)
Interest expense ..................... (7,541) (1,110)
Interest income ...................... 2,831 1,502
Other, net ........................... (404) 2,246
----------- -----------
INCOME BEFORE INCOME TAXES .............. 36,873 72,943
INCOME TAX PROVISION .................... (9,588) (22,539)
----------- -----------
NET INCOME .............................. $ 27,285 $ 50,404
=========== ===========
EARNINGS PER SHARE:
Basic ................................. $ 0.21 $ 0.38
Diluted ............................... $ 0.21 $ 0.38
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<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,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Contract drilling services ........................ $ 291,009 $ 305,571
Labor contract drilling services .................. 20,737 34,534
Turnkey drilling services ......................... 40,075 59,848
Engineering and consulting services ............... 727 1,206
Other revenue ..................................... 3,043 4,105
----------- -----------
355,591 405,264
----------- -----------
OPERATING COSTS AND EXPENSES
Contract drilling services ........................ 154,176 128,231
Labor contract drilling services .................. 18,426 27,393
Turnkey drilling services ......................... 43,069 57,726
Engineering and consulting services ............... 655 1,069
Other expense ..................................... 3,689 2,006
Depreciation and amortization ..................... 39,874 35,640
Selling, general and administrative ............... 15,618 16,579
Minority interest ................................. (834) --
----------- -----------
274,673 268,644
----------- -----------
OPERATING INCOME ..................................... 80,918 136,620
OTHER INCOME (EXPENSE)
Interest expense .................................. (12,257) (2,242)
Interest income ................................... 5,481 3,077
Other, net ........................................ (687) 1,806
----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE .. 73,455 139,261
INCOME TAX PROVISION ................................. (19,831) (42,628)
----------- -----------
INCOME BEFORE EXTRAORDINARY CHARGE ................... 53,624 96,633
EXTRAORDINARY CHARGE, NET OF TAX ..................... (10,833) --
----------- -----------
NET INCOME ........................................... $ 42,791 $ 96,633
=========== ===========
EARNINGS PER SHARE-BASIC:
Income before extraordinary charge ................. $ 0.41 $ 0.74
Extraordinary charge ............................... (0.08) --
----------- -----------
Net income per common share ........................ $ 0.33 $ 0.74
=========== ===========
EARNINGS PER SHARE-DILUTED:
Income before extraordinary charge ................. $ 0.40 $ 0.73
Extraordinary charge ............................... (0.08) --
----------- -----------
Net income per common share ........................ $ 0.32 $ 0.73
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 5
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET INCOME ................................................................ $ 27,285 $ 50,404
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments ................................ 239 (26)
Unrealized holding losses arising during period ......................... (1,299) --
----------- -----------
Other comprehensive loss ................................................ (1,060) (26)
----------- -----------
COMPREHENSIVE INCOME ...................................................... $ 26,225 $ 50,378
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET INCOME ................................................................ $ 42,791 $ 96,633
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments ............................... (108) (56)
----------- -----------
Unrealized (losses) gains on securities:
Unrealized holding losses arising during period ...................... (1,299) (20)
Less: reclassification adjustment for gains realized in net income ... -- 4
----------- -----------
Net unrealized losses ................................................ (1,299) (16)
----------- -----------
Other comprehensive loss ............................................... (1,407) (72)
----------- -----------
COMPREHENSIVE INCOME ...................................................... $ 41,384 $ 96,561
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 6
NOBLE DRILLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................. $ 42,791 $ 96,633
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 39,874 35,640
Deferred income tax provision .......................... 16,760 16,355
Loss (gain) on sales of property and equipment ......... 34 (855)
Extraordinary charge, net of tax ....................... 10,833 --
Equity in net income of unconsolidated joint ventures .. 308 --
Other .................................................. 364 802
Changes in current assets and liabilities:
Accounts receivable ................................... 8,804 (50,904)
Other assets .......................................... 17,490 (6,576)
Accounts payable ...................................... 9,067 35,061
Other liabilities ..................................... (10,164) 20,560
--------- ---------
Net cash provided by operating activities ............. 136,161 146,716
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .......................... (256,053) (267,528)
Proceeds from sale of property and equipment ................ 53 1,929
Investment in and notes receivable from affiliates .......... -- (29,925)
(Investment in) proceeds from sale of marketable securities . (6,830) 16,450
--------- ---------
Net cash used by investing activities ................. (262,830) (279,074)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt .................... 396,731 --
Net (payments) borrowings on revolving credit facility ...... (100,000) 140,000
Payment of long-term debt ................................... (177,807) (5,401)
Issuance of common stock .................................... 416 1,186
Decrease in restricted cash ................................. 1,948 --
--------- ---------
Net cash provided by financing activities ............. 121,288 135,785
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............. (5,381) 3,427
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 211,012 49,917
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 205,631 $ 53,344
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<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 six
month periods ended June 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:
JUNE 30, 1999 $ 27,285 131,336 $ 0.21 132,341 $ 0.21
JUNE 30, 1998 $ 50,404 131,233 $ 0.38 132,518 $ 0.38
SIX MONTHS ENDED:
JUNE 30, 1999 $ 53,624 131,248 $ 0.41 132,106 $ 0.40
JUNE 30, 1998 $ 96,633 131,142 $ 0.74 132,483 $ 0.73
</TABLE>
Included in diluted shares are common stock equivalents relating to
outstanding stock options of 1,005,000 shares and 1,285,000 shares for the three
month periods ended June 30, 1999 and 1998, respectively, and 858,000 shares and
1,341,000 shares for the six month periods ended June 30, 1999 and 1998,
respectively.
NOTE 3 - MARKETABLE EQUITY SECURITIES
The Company's 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 June 30, 1999, the fair market
value of available for sale equity securities totaled $8,199,000, with gross
unrealized losses of $1,299,000. Available for sale equity securities are
included in "Other assets" in the accompanying Condensed Consolidated Balance
Sheets.
6
<PAGE> 8
NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
Effective January 1, 1999, the Company acquired a majority interest in
Arktik Drilling Limited, Inc. ("Arktik"), and the bareboat charter of the Noble
Kolskaya, in exchange for an obligation to pay Kvaerner Maritime A.S.
("Kvaerner") the aggregate principal amount of $17,500,000 plus interest (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 the Company's 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 the Company's 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 June 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 June 30, 1999, $196,323,000
remained available under the Credit Agreement. Additionally, at June 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 our incurring 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 April 1, 1999 and each
October 1 and April 1 thereafter until 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 June 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. Scheduled principal payments are $4,000,000 for the years 1999
through 2002 and $8,000,000 in 2003. The interest rate as of June 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.
7
<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 $127,853,000 as of June 30, 1999. As of June 30, 1999, we
also had $59,200,000 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 six months ended June 30, 1999 and 1998 is shown in
the following table (in thousands). The "Other" column includes results of other
insignificant operations and corporate related items.
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC LABOR
CONTRACT CONTRACT CONTRACT TURNKEY
THREE MONTHS ENDED: DRILLING DRILLING DRILLING DRILLING
JUNE 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL
- ------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers .... $ 117,535 $ 24,791 $ 10,995 $ 21,879 $ 271 $ 175,471
Intersegment revenues ............... -- -- -- -- -- --
Segment profit (loss) ............... 27,886 (2,366) 1,662 (389) 469 27,262
Total assets at June 30, 1999 (1) ... 1,207,356 955,661 24,702 12,646 245,789 2,446,154
JUNE 30, 1998:
- --------------
Revenues from external customers .... $ 118,536 $ 39,786 $ 17,859 $ 40,047 $ -- $ 216,228
Intersegment revenues ............... -- 2,293 -- 135 -- 2,428
Segment profit (loss) ............... 32,270 15,560 2,357 829 (613) 50,403
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
INTERNATIONAL DOMESTIC LABOR
CONTRACT CONTRACT CONTRACT TURNKEY
SIX MONTHS ENDED: DRILLING DRILLING DRILLING DRILLING
JUNE 30, 1999: SERVICES SERVICES SERVICES SERVICES OTHER TOTAL
- ----------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers .... $ 244,725 $ 47,075 $ 23,507 $ 40,075 $ 209 $ 355,591
Intersegment revenues ............... -- 1,305 -- -- -- 1,305
Segment profit (loss) ............... 60,695 (4,215) 2,619 (3,228) (2,275) 53,596
JUNE 30, 1998:
- --------------
Revenues from external customers .... $ 224,482 $ 82,099 $ 38,000 $ 60,675 $ 8 $ 405,264
Intersegment revenues ............... 873 2,293 -- 135 -- 3,301
Segment profit (loss) ............... 61,417 31,776 5,940 388 (2,888) 96,633
</TABLE>
- --------------
(1) Total assets - Other at June 30, 1999 includes cash and cash
equivalents of $185,199,000.
The following table is a reconciliation of reportable segment profit
or loss to our consolidated totals for the three and six months ended June 30,
1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total profit for reportable segments .... $ 27,262 $ 50,403
Elimination of intersegment losses ...... 23 1
----------- -----------
Total consolidated net income .. $ 27,285 $ 50,404
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total profit for reportable segments .... $ 53,596 $ 96,633
Elimination of intersegment losses ...... 28 --
Extraordinary charge, net of tax ........ (10,833) --
----------- -----------
Total consolidated net income .. $ 42,791 $ 96,633
=========== ===========
</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 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).
9
<PAGE> 11
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.
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.
Oil and gas prices have recovered significantly over the last six
months; however, there has not been a corresponding improvement in the market
for our services, as evidenced by the continued low utilization rates and low
dayrate renewals on contract expirations. Although we do not expect drilling
activity to improve significantly over the remainder of 1999, we are encouraged
about our sector's fundamentals longer-term and expect the demand for our
services to begin to improve in 2000, subject to oil and natural gas prices
remaining at approximately their current levels. However, we believe that a
significant decrease from current oil and gas price levels will further depress
the level of exploration and production activity and result in a corresponding
decline in demand for our services. Furthermore, the continued consolidation of
the oil and gas industry, as evidenced by the announcement and completion of
several recent transactions, has resulted in, and is likely to continue to
result in, a reduction in the amount of capital spent on exploration and
production activities.
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
that we believe allows us to convert our three-column submersible drilling rigs
into ultra-deepwater semisubmersibles at a lower cost and on an accelerated
delivery schedule versus a new construction project. We delivered our first
EVA-4000(TM) semisubmersible, the Noble Paul Romano, in the fourth quarter of
1998. The Noble Paul Wolff and Noble Jim Thompson EVA-4000(TM) semisubmersibles
were delivered in the second quarter of 1999. The Noble Amos Runner EVA-4000(TM)
semisubmersible was delivered in August 1999. The Noble Max Smith, an
EVA-4000(TM) semisubmersible conversion, is in progress and is expected to be
available for service in late 1999. The Noble Homer Ferrington, a Friede &
Goldman 9500 Enhanced Pacesetter, is being upgraded and is expected to be
available for service 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 a five year contract in the U.S. Gulf of
Mexico. 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 six years in Brazil. The Noble Jim Thompson, which is capable of drilling in
6,000 feet of water, is contracted to Shell Deepwater for an initial term of
three years, with options to extend by Shell Deepwater, in the U.S. Gulf of
Mexico. 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 a five
year term in the U.S. Gulf of Mexico.
10
<PAGE> 12
FORM 10-Q
The Noble Max Smith, which is currently subject to a letter of intent,
will be capable of drilling in 6,000 feet of water. We are attempting to
finalize five-year drilling contracts with Amerada Hess Corporation and Union
Pacific Resources Corporation to work the unit in the U.S. Gulf of Mexico. Union
Pacific has expressed to us its desire to contract the unit for less than its 30
month portion of the five-year contract and at a lower dayrate than is provided
for in the letter of intent. We are continuing to upgrade the unit and expect to
deliver it in late l999 under the terms and conditions of the letter of intent.
The Noble Homer Ferrington remains subject to the letter agreements dated
February 1998 with Samedan Oil Corporation and Mariner Energy, Inc. for a
five-year drilling contract in the U.S. Gulf of Mexico. We continue to meet with
these two operators to work toward the finalization of the drilling contract and
related rig sharing agreement. Mariner previously expressed the position that
its letter agreement expired by its terms on May 1, 1998, and further expressed
its intention to work toward a mutually acceptable outcome because Mariner still
needs access to such a deepwater rig. Samedan has also recently questioned the
extent of its obligations under its letter agreement, particularly if Mariner
defaults on its commitment under its letter agreement. We do not agree with the
position that either letter agreement has expired, and we are continuing to work
with both parties toward a mutually acceptable outcome. However, the Company
intends to pursue the performance by such parties of their commitments under the
terms and conditions of their respective letter agreements. Shipyard work on the
rig, which will be capable of drilling in 6,000 feet of water, is progressing on
a schedule for delivery of the rig in the first quarter of 2000. If we are
unable to finalize the contracts covering either the Noble Max Smith and/or
Noble Homer Ferrington, we could experience delays in finding alternate
customers. Failure or delay in contracting the units with alternate customers
under terms as favorable to us as those reflected in the existing letter of
intent and letter agreements would adversely affect our future revenues.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL
Net income for the second quarter of 1999 (the "Current Quarter") was
$27,285,000, or $0.21 per diluted share, on operating revenues of $175,471,000,
compared to net income for the second quarter of 1998 (the "Comparable Quarter")
of $50,404,000, or $0.38 per diluted share, on operating revenues of
$216,228,000.
RIG UTILIZATION, OPERATING DAYS AND AVERAGE DAYRATES
The following table sets forth the average rig utilization rates,
operating days and average day rate for our rig fleet for the three months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE
------------------------ ------------------------- ------------------------
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------ ------------------------- ------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
International......... 76% 90% 1,984 2,283 $ 59,201 $ 52,017
Domestic.............. 66% 89% 735 813 $ 33,521 $ 48,923
</TABLE>
- ---------------------
(1) Information reflects our policy to report utilization rates based on
the number of actively marketed rigs in our fleet.
11
<PAGE> 13
INTERNATIONAL OPERATIONS
The following table sets forth the operating revenues and gross margin
for our international operations for the three months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
------------------------- --------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services ........... $ 117,455 $ 118,755 $ 59,374 $ 63,129
Labor contract drilling services ..... 9,747 16,267 1,131 2,583
Turnkey drilling services ............ -- 72 -- (3,074)
Engineering and consulting services .. 383 522 26 91
Other ................................ 1,216 850 (517) 470
---------- ---------- ---------- ----------
Total ....................... $ 128,801 $ 136,466 $ 60,014 $ 63,199
========== ========== ========== ==========
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
decreased $1,300,000 in the Current Quarter as compared to the Comparable
Quarter primarily due to lower average rig utilization rates and operating days.
There were nine jackup rigs and one semisubmersible rig stacked for varying
amounts of time during the Current Quarter, which led to an average utilization
of 76 percent in the Current Quarter as compared to 90 percent in the Comparable
Quarter. The geographic locations affected the most by decreased average rig
utilization were Mexico, Africa 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. Additionally,
the Noble Paul Wolff, an EVA-4000(TM) 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 $6,520,000 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 certain contract expirations which were not
renewed coupled with reduced drilling and workover activities by our customers.
International turnkey drilling services revenues were not significant in either
the Current Quarter or the Comparable Quarter. There were no international
turnkey well completions in either the Current Quarter or the Comparable
Quarter.
GROSS MARGIN. International contract drilling services gross margin
decreased $3,755,000 in the Current Quarter as compared to the Comparable
Quarter primarily due to lower average rig utilization rates coupled with
certain ongoing operating expenses incurred on rigs that were stacked during the
Current Quarter. Labor contract drilling services gross margin decreased
$1,452,000 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 June 30, 1999 and 1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
------------------------- --------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services .. $ 24,638 $ 39,774 $ 8,810 $ 28,082
Turnkey drilling services ... 21,879 39,774 (228) 5,633
Other ....................... 153 214 152 (40)
---------- ---------- ---------- ----------
Total .............. $ 46,670 $ 79,762 $ 8,734 $ 33,675
========== ========== ========== ==========
</TABLE>
12
<PAGE> 14
OPERATING REVENUES. Domestic contract drilling services revenues
decreased $15,136,000 in the Current Quarter as compared to the Comparable
Quarter due primarily to lower average dayrates and utilization. One jackup rig
and three submersible rigs were stacked for the majority of the Current Quarter,
which led to an average utilization rate of 66 percent in the Current Quarter as
compared to 89 percent in the Comparable Quarter. The demand for offshore
drilling units in the U.S. Gulf of Mexico remains at depressed levels. The
decrease in utilization was partially offset by the revenues generated from the
Noble Paul Romano, the first EVA-4000(TM) semisubmersible delivered in December
1998, and the Noble Jim Thompson, an EVA-4000(TM) semisubmersible, which began
operating in June 1999. Domestic turnkey drilling services revenues were
$17,895,000 lower in the Current Quarter as compared to the Comparable Quarter
due to lower turnkey rates charged to customers and the completion of turnkey
wells that were less complex and thus produced lower average revenues than those
wells completed in the Comparable Quarter. Seven domestic turnkey wells were
completed in the Current Quarter as compared to six in the Comparable Quarter.
GROSS MARGIN. While the dayrates of the Noble Paul Romano and
Noble Jim Thompson are higher than our average domestic dayrate and, therefore,
favorably impacted domestic contract drilling services gross margin in the
Current Quarter, gross margin decreased $19,272,000 in the Current Quarter as
compared to the Comparable Quarter due primarily to lower average dayrates and
utilization. Although there was an increase in domestic turnkey well completions
in the Current Quarter as compared to the Comparable Quarter, the negative
gross margin is attributable to above market dayrates paid by our turnkey
subsidiary and lower utilization by that subsidiary of certain drilling rigs
which it has under term contract from a third party.
OTHER ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $2,626,000 in the Current Quarter as compared to the
Comparable Quarter due primarily to the activation of the Noble Paul Romano,
Noble Paul Wolff and Noble Jim Thompson EVA-4000(TM) semisubmersibles in
December 1998, May 1999 and June 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased $2,180,000 in the Current Quarter as
compared to the Comparable Quarter primarily due to the implementation of cost
reduction initiatives.
INTEREST EXPENSE. Interest expense increased $6,431,000 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 the March 1999 issuance
of $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"). Additionally,
in connection with the acquisition of a majority interest in Arktik Drilling
Limited, Inc. ("Arktik"), and 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 $7,260,000 and $3,571,000 in the
Current Quarter and the Comparable Quarter, respectively.
INTEREST INCOME. Interest income increased $1,329,000 in the Current
Quarter as compared to the Comparable Quarter due to higher average cash
balances resulting from the completion of project financings and the March 1999
issuance of the Notes.
INCOME TAX PROVISION. Income tax expense decreased $12,951,000 in the
Current Quarter as compared to the Comparable Quarter 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.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL
Net income for the six months ended June 30,1999 (the "Current
Period"), excluding non-recurring items, was $53,624,000, or $0.40 per diluted
share, on operating revenues of $355,591,000, compared to net income of
$96,633,000, or $0.73 per diluted share, on operating revenues of $405,264,000
for the six months ended June 30, 1998 (the "Comparable Period").
13
<PAGE> 15
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.
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 six months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
AVERAGE RIG
UTILIZATION RATES (1) OPERATING DAYS AVERAGE DAYRATE
------------------------ ------------------------- ------------------------
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------ ------------------------- ------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
International......... 83% 90% 4,265 4,542 $ 57,240 $ 49,362
Domestic.............. 64% 94% 1,397 1,605 $ 33,559 $ 50,698
</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 six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
--------------------------- ------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services....................... $ 244,127 $ 224,201 $ 121,147 $ 119,387
Labor contract drilling services................. 20,737 34,534 2,311 7,141
Turnkey drilling services........................ -- 3,463 -- (4,955)
Engineering and consulting services.............. 727 1,206 72 137
Other............................................ 2,789 2,161 (651) 639
----------- ----------- ---------- -----------
Total................................... $ 268,380 $ 265,565 $ 122,879 $ 122,349
=========== =========== ========== ===========
</TABLE>
OPERATING REVENUES. International contract drilling services revenues
increased $19,926,000 in the Current Period as compared to the Comparable Period
primarily due to higher average dayrates on certain contract renewals in the
North Sea and 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. The
increase in average dayrate was partially offset by lower average rig
utilization in Mexico, Africa and the Middle East. Labor contract drilling
services revenues decreased $13,797,000 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 certain contract expirations which 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 $3,463,000 generated in the Comparable Period. There were no
international turnkey well completions in either the Current Period or the
Comparable Period.
14
<PAGE> 16
GROSS MARGIN. International contract drilling services gross margin
increased $1,760,000 in the Current Period as compared to the Comparable Period
primarily due to higher average dayrates on certain contract renewals in the
North Sea. The increase in gross margin was partially offset by lower average
utilization in Mexico, Africa and the Middle East coupled with certain ongoing
operating expenses incurred on rigs that were stacked during the Current Period.
Labor contract drilling services gross margin decreased $4,830,000 in the
Current Period as compared to the Comparable Period primarily due to fewer
operating days on the North Sea labor contracts as a result of certain contract
expirations which were not renewed 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 six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN
--------------------------- --------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Contract drilling services....................... $ 46,882 $ 81,370 $ 15,686 $ 57,953
Turnkey drilling services........................ 40,075 56,385 (2,994) 7,077
Other ........................................... 254 1,944 5 1,460
----------- ----------- ----------- -----------
Total................................... $ 87,211 $ 139,699 $ 12,697 $ 66,490
=========== =========== =========== ===========
</TABLE>
OPERATING REVENUES. Domestic contract drilling services revenues
decreased $34,488,000 in the Current Period as compared to the Comparable Period
due primarily to lower average dayrates and utilization. The revenue decrease
was partially offset by revenues from the Noble Paul Romano, which completed its
first six months of operations in the Current Period, and the Noble Jim
Thompson, which began operating for Shell Deepwater in June 1999. Both earn a
dayrate that is higher than our average domestic dayrate. One jackup rig and
three submersible rigs were stacked for the majority of the Current Period,
which led to an average utilization rate of 64 percent in the Current Period as
compared to 94 percent in the Comparable Period. Domestic turnkey drilling
services revenues were $16,310,000 lower in the Current Period as compared to
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. Twelve
domestic turnkey wells were completed in the Current Period as compared to eight
in the Comparable Period.
GROSS MARGIN. While the operations of the Noble Paul Romano and
Noble Jim Thompson favorably impacted domestic contract drilling services gross
margin in the Current Period, gross margin decreased $42,267,000 in the Current
Period as compared to the Comparable Period due primarily to lower average
dayrates and utilization 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 paid by our
turnkey subsidiary and lower utilization by that subsidiary of certain drilling
rigs which it has under term contract from a third party.
OTHER ITEMS
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $4,234,000 in the Current Period as compared to the Comparable
Period due primarily to the activation of the Noble Paul Romano, Noble Paul
Wolff and Noble Jim Thompson EVA-4000(TM) semisubmersibles in December 1998, May
1999 and June 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased
$961,000 in the Current Period as compared to the Comparable Period primarily
due to the implementation of cost reduction initiatives in the Current Period.
15
<PAGE> 17
INTEREST EXPENSE. Interest expense increased $10,015,000 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 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 $14,441,000 and $5,953,000 in the Current Period and the
Comparable Period, respectively.
INTEREST INCOME. Interest income increased $2,404,000 in the Current
Period as compared to the Comparable Period due to higher average cash balances
resulting from the completion of project financings and the March 1999 issuance
of the Notes.
INCOME TAX PROVISION. Income tax expense decreased $22,797,000 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 June 30, 1999, we had cash and cash equivalents of $205,631,000 and
approximately $196,323,000 of funds available under our line of credit. We had
working capital of $151,064,000 and $88,720,000 at June 30, 1999 and December
31, 1998, respectively. Total debt as a percentage of total debt plus
shareholders' equity was 38 percent at June 30, 1999 compared to 32 percent at
December 31, 1998.
Capital expenditures totaled $124,717,000 and $256,053,000 for the
Current Quarter and Current Period, respectively. We expect capital expenditures
for the remainder of 1999 to aggregate approximately $225,000,000, of which the
majority relates to conversions and upgrades of drilling units. Approximately
$130,000,000 of the $225,000,000 is for the conversions of the Noble Amos Runner
and Noble Max Smith to EVA-4000(TM) semisubmersibles. Additionally, we expect to
incur capital expenditures of approximately $92,000,000 over the remainder of
1999 to upgrade the equipment and water depth capability of the Noble Homer
Ferrington. The conversion and upgrade of these units is scheduled to be
completed in late 1999 or early 2000. We expect the total cost of these three
semisubmersible conversions and upgrade projects to be approximately
$482,000,000.
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 $127,853,000 through June 30, 1999. As of June
30, 1999, we also had $59,200,000 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.
In May 1997, the Board of Directors of Noble Drilling authorized the
repurchase of up to 10,000,000 shares of Noble Drilling common stock, or
approximately eight percent of the then outstanding common stock. As of June 30,
1999, we had repurchased 2,730,000 shares of common stock at a total cost of
$62,738,000. Additional purchases, if any, would be made from time to time on
the open market or in private transactions at prices determined by us.
CREDIT FACILITIES AND LONG-TERM DEBT
As of June 30, 1999, our short-term debt and current installments of
long-term debt balance was $59,100,000 as compared to $148,786,000 as of
December 31, 1998. As of June 30, 1999, our long-term debt balance was
$760,389,000 as compared to $460,842,000 as of December 31, 1998.
16
<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 June 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
June 30, 1999, we had the ability to borrow $196,323,000 under the Credit
Agreement. Additionally, at June 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 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 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.
As of July 1, 1999, we estimated that our required debt principal and
interest payments for then outstanding debt to be approximately $55,649,000 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 June
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.
The year 2000 remediation and testing phases for critical IT systems
are expected to be substantially completed by September 30, 1999. We are
developing a contingency plan for year 2000 issues to address business
interruptions. We expect to have a contingency plan completed by September 30,
1999.
As of June 30, 1999, we had incurred costs of approximately $125,000
related to our year 2000 project. The estimated additional costs to complete the
project are approximately $125,000. 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.
17
<PAGE> 19
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
June 30, 1999, there were no outstanding borrowings under the Credit Agreement
and $37,750,000 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 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.
18
<PAGE> 20
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
June 30, 1999.
19
<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: August 14, 1999 /s/ ROBERT D. CAMPBELL
-------------------------------------------
ROBERT D. CAMPBELL,
President
DATE: August 14, 1999 /s/ BYRON L. WELLIVER
-------------------------------------------
BYRON L. WELLIVER,
Senior Vice President-Finance,
Treasurer and Controller
(Principal Financial and Accounting
Officer)
20
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 205,631
<SECURITIES> 0
<RECEIVABLES> 148,077
<ALLOWANCES> 519
<INVENTORY> 5,008
<CURRENT-ASSETS> 412,435
<PP&E> 2,293,388
<DEPRECIATION> 356,815
<TOTAL-ASSETS> 2,446,154
<CURRENT-LIABILITIES> 261,371
<BONDS> 760,389
0
0
<COMMON> 13,393
<OTHER-SE> 1,339,265
<TOTAL-LIABILITY-AND-EQUITY> 2,446,154
<SALES> 0
<TOTAL-REVENUES> 355,591
<CGS> 0
<TOTAL-COSTS> 220,015
<OTHER-EXPENSES> 54,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,257
<INCOME-PRETAX> 73,455
<INCOME-TAX> 19,831
<INCOME-CONTINUING> 53,624
<DISCONTINUED> 0
<EXTRAORDINARY> (10,833)
<CHANGES> 0
<NET-INCOME> 42,791
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.32
</TABLE>
