CLIFFS DRILLING CO, 10-Q, 1996-08-08

CLIFFS DRILLING CO
10-Q, 1996-08-08
DRILLING OIL & GAS WELLS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

-------------------------

FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 1996

Commission File Number 0-16703

CLIFFS DRILLING COMPANY
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 76-0248934
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1200 Smith Street, Suite 300
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)

(713) 651-9426
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--------- ---------

Number of shares of Common Stock outstanding as of August 7, 1996: 7,408,585

(Exhibit Index Located on Page 21)

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<PAGE> 2
CLIFFS DRILLING COMPANY
Form 10-Q
For the Three and Six Months Ended June 30, 1996

<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Consolidated Statements of Operations (Unaudited) -
CLIFFS DRILLING COMPANY
Three and Six Months Ended June 30, 1996 and 1995. . . . . . . . . . . . . . . 3

Consolidated Balance Sheets -
CLIFFS DRILLING COMPANY
June 30, 1996 (Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . 4

Consolidated Statements of Cash Flows (Unaudited) -. . . . . . . . . . . . . . .
CLIFFS DRILLING COMPANY
Three and Six Months Ended June 30, 1996 and 1995. . . . . . . . . . . . . . . 5

Notes to Interim Consolidated Financial Statements (Unaudited) . . . . . . . . . 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 11

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 19

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

2
<PAGE> 3
CLIFFS DRILLING COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1996 1995 1996 1995
------- ------ ------- ------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,699 $ 14,457 $ 42,760 $ 28,735
Income (Loss) from Equity Investments . . . . . . . . . . . . . . . . . 79 (504) 96 (500)
--------- --------- --------- ---------
13,778 13,953 42,856 28,235
COSTS AND EXPENSES:
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 8,227 12,315 30,073 21,754
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . 1,674 1,383 3,177 3,456
General and Administrative Expense . . . . . . . . . . . . . . . . . . 1,416 1,265 2,814 2,617
--------- --------- --------- ---------
11,317 14,963 36,064 27,827
--------- --------- --------- ---------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . 2,461 (1,010) 6,792 408
OTHER INCOME (EXPENSE):
Gain (Loss) on Disposition of Assets . . . . . . . . . . . . . . . . 2,670 (48) 2,647 (41)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 272 804 566
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,560) (33) (1,586) (65)
Exchange Rate Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . (985) 428 148 302
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (655) (59) (723)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . 3,054 (1,046) 8,746 447
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . . . . . 1,069 (261) 3,061 112
--------- --------- --------- ---------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,985 (785) 5,685 335
DIVIDENDS APPLICABLE TO PREFERRED STOCK . . . . . . . . . . . . . . . . -- (665) (31) (1,330)
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES . . . . . . . . . . . . . . . . . . . . . . . $ 1,985 $ (1,450) $ 5,654 $ (995)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ (0.35) $ 0.89 $ (0.24)
========= ========= ========= =========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . . $ (0.35) $ (0.24)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,824 4,104 6,363 4,096
========= ========= ========= =========
Assuming Full Dilution . . . . . . . . . . . . . . . . . . . . . . . .
4,104 4,096
========= =========
</TABLE>

See accompanying notes to interim consolidated financial statements.

3
<PAGE> 4
CLIFFS DRILLING COMPANY

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,585 $ 26,405
Accounts Receivable, net of allowance for doubtful accounts of $797 at
June 30, 1996 and December 31, 1995, respectively . . . . . . . . . . . 17,751 11,170
Notes and Other Receivables, Current . . . . . . . . . . . . . . . . . . . 15,210 1,812
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,023 4,114
Drilling Contracts in Progress . . . . . . . . . . . . . . . . . . . . . . 7,218 11,339
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 957
Other Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,727 2,400
----------- ------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . 95,248 58,197

PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment . . . . . . . . . . . . . . . . . . . . . . . . 258,775 122,777
Oil and Gas Properties ("successful efforts" method) . . . . . . . . . . . 23,775 23,497
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,781 3,201
----------- ------------
286,331 149,475
Less: Accumulated Depreciation, Depletion and Amortization . . . . . . . . (86,454) (83,525)
----------- ------------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . . . 199,877 65,950

NOTES AND OTHER RECEIVABLES, LONG-TERM . . . . . . . . . . . . . . . . . . 3,993 4,441
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES . . . . . . . . . 3,552 269
DEFERRED CHARGES AND OTHER . . . . . . . . . . . . . . . . . . . . . . . . 5,199 105
----------- ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 307,869 $ 128,962
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,249 $ 20,392
Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,663 1
Other Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 8,102 3,945
----------- ------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . 24,014 24,338

10.25% SENIOR NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 --
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 3,979 1,447
DEFERRED INCOME AND OTHER . . . . . . . . . . . . . . . . . . . . . . . . 391 412
REDEEMABLE PREFERRED STOCK:
$2.3125 Convertible Exchangeable Preferred Stock, 3,000,000 shares
authorized; 1,150,000 shares issued and outstanding at
December 31, 1995 ($28,750 liquidation value) . . . . . . . . . . . . . . -- 28,750
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized; 7,845,036 and
4,518,104 shares issued and 7,406,748 and 4,113,067 shares outstanding at
June 30, 1996 and December 31, 1995, respectively . . . . . . . . . . . . 78 45
Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,509 99,186
Retained Earnings (Deficit) . . . . . . . . . . . . . . . . . . . . . . . . (14,454) (20,108)
Less: Notes Receivable from Officers for Restricted Stock . . . . . . . . (232) (232)
Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . (22) (32)
Treasury Stock, at cost, 438,288 and 405,037 shares at June 30,
1996 and December 31, 1995, respectively. . . . . . . . . . . . . . (5,394) (4,844)
----------- ------------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . 129,485 74,015
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . $ 307,869 $ 128,962
=========== ============
</TABLE>

See accompanying notes to interim consolidated financial statements.

4
<PAGE> 5
CLIFFS DRILLING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,985 $ (785) $ 5,685 $ 335
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization . . . . . . . . . . . . . 1,674 1,383 3,177 3,456
Mobilization Expense Amortization . . . . . . . . . . . . . . . . . 66 130 196 257
(Gain) Loss on Disposition of Assets . . . . . . . . . . . . . . . (2,670) 48 (2,647) 41
Amortization of Debt Issue Costs . . . . . . . . . . . . . . . . . 80 -- 80 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 65 243 115
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable and Notes and Other Receivables . . . . . . (4,621) 4,582 (14,879) (2,480)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (230) 681 (909) 1,123
Drilling Contracts in Progress . . . . . . . . . . . . . . . . (3,947) (4,065) 4,125 (5,633)
Prepaid Insurance and Other Prepaid Expenses . . . . . . . . . (530) (690) (1,274) 1,005
Investments in and Advances to Unconsolidated Affiliates . . . (79) (1,446) (96) (50)
Deferred Charges and Other . . . . . . . . . . . . . . . . . . -- 1 -- --
Accounts Payable and Other Accrued Expenses . . . . . . . . . . 4,267 3,794 1,743 1,034
----------- ----------- ----------- ----------
Net Cash Provided By (Used In) Operating Activities . . . (3,703) 3,698 (4,556) (797)

INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . (10,406) (6,987) (13,216) (8,118)
Acquisition of Rigs and Related Equipment . . . . . . . . . . . . . (105,405) -- (105,405) (1,750)
Acquisition of Equity Interest in Rig and Related Equipment . . . . (3,187) -- (3,187) --
Proceeds from Sale of Property and Equipment . . . . . . . . . . . 770 140 997 203
Insurance Proceeds from Loss of Rig and Related Equipment . . . . -- -- 292 --
Collection of Notes Receivable . . . . . . . . . . . . . . . . . . 231 109 448 1,237
----------- ----------- ----------- ----------
Net Cash Used In Investing Activities . . . . . .. . . . (117,997) (6,738) (120,071) (8,428)

FINANCING ACTIVITIES:
Proceeds from Borrowings . . . . . . . . . . . . . . . . . . . . . 150,000 2,000 150,000 2,000
Debt Issue Costs . . . . . . . . . . . . . . . . . . . . . . . . . (4,651) -- (4,651) --
Acquisition of Treasury Stock . . . . . . . . . . . . . . . . . . . -- -- (661) --
Payments for Redemption of Preferred Stock . . . . . . . . . . . . -- -- (850) --
Preferred Stock Dividends . . . . . . . . . . . . . . . . . . . . . -- (665) (31) (1,330)
----------- ----------- ----------- ----------
Net Cash Provided By Financing Activities . . . . . . . . 145,349 1,335 143,807 670
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . 23,649 (1,705) 19,180 (8,555)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . 21,936 4,470 26,405 11,320
----------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . $ 45,585 $ 2,765 $ 45,585 $ 2,765
=========== =========== =========== ==========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for Acquisition of Rigs and Related
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,215 $ -- $ 22,215 $ --
=========== =========== =========== ==========

</TABLE>

See accompanying notes to interim consolidated financial statements.

5
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CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements 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 of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal and recurring adjustments) necessary to present a fair statement
of the results for the periods included herein have been made and the
disclosures contained herein are adequate to make the information presented not
misleading. Operating results for the three and six months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.

2. EARNINGS PER SHARE

Primary earnings (loss) per share computations are based on net income (loss)
less dividends on the Company's $2.3125 Convertible Exchangeable Preferred
Stock (the "Preferred Stock"), divided by the average number of common shares
and equivalents outstanding during the respective periods. Common stock
equivalents include the number of shares issuable upon exercise of stock
options, less the number of shares that could have been repurchased with the
exercise proceeds using the treasury stock method. The Preferred Stock is not
included in the primary earnings (loss) per share computation as it is not a
common stock equivalent. Fully diluted earnings per common share computations
are made after the assumption of conversion of the Preferred Stock when the
effect of such conversion is dilutive.

3. CONVERTIBLE EXCHANGEABLE PREFERRED STOCK

The Company converted 1,115,988 shares of its 1,150,000 issued and outstanding
shares of $2.3125 Convertible Exchangeable Preferred Stock on January 17, 1996.
The Company issued 2,113,557 shares of Common Stock upon conversion of the
Preferred Stock. The remaining 34,012 shares were redeemed for cash in the
amount of $25.69 per share plus $.22 per share in accrued and unpaid dividends
thereon through the redemption date at a cost to the Company of approximately
$.9 million.

4. ACQUISITIONS AND FINANCING

On May 23, 1996, the Company completed the acquisition of 9 jack-up drilling
rigs and a 50% interest in a joint venture which owns an additional jack-up
drilling rig, and their related assets (collectively referred to as the
"Southwestern Rigs") operated by Southwestern Offshore Corporation
("Southwestern"). Pursuant to an Acquisition Agreement dated May 13, 1996, the
Southwestern Rigs were acquired as follows: (a) Cliffs Drilling Asset
Acquisition Company, a newly formed Delaware corporation and wholly-owned
subsidiary of the Company ("Newco"), acquired 6 rigs from Viking Supply Ships
A.S. ("Viking"), (b) Newco acquired one rig from Ocean Master III Inc.
("Ocean"), (c) Newco acquired one rig from Production Partner Inc. ("Partner"),
(d) Newco acquired a partial indirect interest in one rig owned by West Indies
Drilling Joint Venture (the "Joint Venture") through the purchase by Newco of
the outstanding capital stock of Viking Trinidad Limited, a partner in the
Joint Venture, and (e) Cliffs Drilling Merger Company, a newly formed Delaware
corporation and wholly-owned subsidiary of the Company ("Merger Sub"),
acquired one

6
<PAGE> 7
rig through the merger of Trivium Investments Limited ("Trivium") with and into
Merger Sub. As used herein, the term "Sellers" shall mean Southwestern, Viking,
Ocean, Partner and Trivium.

The purchase price of the Southwestern Rigs was (a) $103.8 million in cash
(after reductions of $6.2 million for required refurbishments of certain
Southwestern Rigs not made prior to closing) plus (b) issuance of 1.2 million
shares of the Company's Common Stock, $0.01 par value per share (the "Shares")
and (c) assumption of certain contractual liabilities, including the Company's
guarantee of $4.25 million in indebtedness of the Joint Venture to Citibank
N.A. related to the refurbishment of the jack-up drilling rig owned by the
Joint Venture (together with accrued but unpaid interest thereon and costs of
collection). Pursuant to the Acquisition Agreement, the Company has registered
resale of the Shares.

In part to finance the acquisition of the Southwestern Rigs, the Company sold
$150 million of 10.25% Senior Notes due 2003 (the "Notes") in a private
placement on May 23, 1996. Interest on the Notes accrues from May 23, 1996 and
will be payable semi-annually in cash in arrears on May 15 and November 15 of
each year, commencing November 15, 1996. Of the $144.8 million net proceeds
received by the Company in connection with the sale of the Notes, $103.8 million
was used to fund the cash portion of the purchase price for the Southwestern
Rigs and $6.2 million was reserved to complete refurbishments of 2 rigs not
completed by Sellers prior to closing. The Company has allocated $12 million of
the net proceeds from the sale of the Notes for the acquisition, mobilization
and refurbishment of the Diamond Rig (as defined below). The remaining proceeds
will be used for general corporate purposes which may include up to $15 million
to acquire land rigs for use in Venezuela.

In addition, on May 10, 1996, the Company acquired the jack-up drilling rig
OCEAN MAGALLANES (the "Diamond Rig") from Diamond Offshore Southern Company for
$4.5 million. The Company has renamed this unit CLIFFS DRILLING NO. 155. The
Company has mobilized the Diamond Rig to Venezuela where it is currently being
refurbished and upgraded prior to commencing operations in Venezuela. The
Company signed a letter of intent with Maraven S.A. for the Diamond Rig and
expects to sign an initial eight-month contract with Maraven for use of the
Diamond Rig in Lake Maracaibo, Venezuela.

5. NOTES PAYABLE

On June 27, 1996, the Company and Internationale Nederlanden (U.S.) Capital
Corporation ("ING") modified and amended the Company's $20.0 million credit
facility (the "Revolving Credit Facility") to, among other things, increase the
amount available under such facility to $35 million. The Revolving Credit
Facility matures on May 31, 1998. At June 30, 1996, the Company had no
indebtedness outstanding under the Revolving Credit Facility.

6. ASSET DISPOSITION

On June 19, 1996, Cliffs Drilling No. 11 completed its two-year bareboat charter
as a workover rig in the U.S. Gulf of Mexico. The charterer exercised its option
to purchase the unit for $5.4 million and executed a note payable to the Company
maturing on October 31, 1996. Interest accrues at the rate of $2,500 per day and
is due monthly, and the note is secured by the rig and its related equipment.
The Company recognized a $2.7 million gain on disposition of the unit in June,
1996.

7. EXCHANGE RATE GAIN (LOSS)

The Company's foreign exchange gains and losses are primarily attributable to
the Venezuela Bolivar (the "Bolivar"). Venezuela instituted currency exchange
controls during June, 1994. The Venezuelan government allowed the Bolivar to
"float" relative to other currencies on April 22, 1996. Significant devaluation
of the Bolivar occurred, resulting in net exchange rate losses of $1.0 million
during the second quarter of 1996.

7
<PAGE> 8
8. CHANGE IN PRESENTATION

Certain financial statement items have been reclassified in the prior year to
conform with the current year presentation.

9. PRO FORMA FINANCIAL INFORMATION

The unaudited Pro Forma Consolidating Statements of Operations (the "Pro Forma
Statements") give effect to the acquisition of the Southwestern Rigs using the
purchase method of accounting given the related assumptions and adjustments,
the offering of $150 million 10.25% Senior Notes due 2003 and the issuance of
1.2 million shares of the Company's Common Stock valued at an average price of
$18.51 per share in connection with the Southwestern Rigs acquisition.

The Pro Forma Statements are based upon the historical unaudited consolidated
financial statements of the Company and Southwestern for the six months ended
June 30, 1996 and 1995. The historical financial statements of Southwestern
include the operating results of the Southwestern Rigs during the periods
indicated to the date of acquisition, May 23, 1996. However, the financial
statements of Southwestern exclude depreciation expense related to the
Southwestern Rigs because Southwestern managed, rather than owned, the rigs. The
historical results of Southwestern include the results of operations of the rigs
that were available for service during the indicated periods. During the six
months ended June 30, 1995, 40% of the Southwestern Rigs were not available for
service as a result of being cold stacked or refurbished.

The Pro Forma Statements for the six months ended June 30, 1996 were prepared
assuming that the transactions described above were consummated as of January
1, 1995. The Pro Forma Statements have been prepared based upon assumptions
deemed appropriate by the Company and may not be indicative of actual results.
The historical results of Southwestern's operations are included with the
Company's results beginning May 23, 1996. The unaudited Pro Forma Consolidating
Statements of Operations for the year ended December 31, 1995 are included in
the Company's current report on Form 8-K dated May 23, 1996.

8
<PAGE> 9
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
------------------------------------------------------------
Historical Pro Forma
--------------------------- -----------------------------
Cliffs Southwestern Adjustments Combined
---------- ------------- ------------ ----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Revenues. . . . . . . . . . . . . . . . . . . . $ 42,760 $ 14,567 $ (160)(a) $ 57,167
Income from Equity Investments. . . . . . . . . 96 -- -- 96
---------- ------------ --------------- ----------
42,856 14,567 (160) 57,263
COSTS AND EXPENSES:
Operating Expenses. . . . . . . . . . . . . . . 30,073 14,623 (3,311)(b) 41,385
Depreciation, Depletion and Amortization. . . . 3,177 96 2,369 (c) 5,642
General and Administrative Expense 2,814 763 -- 3,577
---------- ------------ --------------- ----------
36,064 15,482 (942) 50,604
---------- ------------ --------------- ----------

OPERATING INCOME (LOSS). . . . . . . . . . . . . . 6,792 (915) 782 6,659
OTHER INCOME (EXPENSE):
Gain on Disposition of Assets . . . . . . . . . 2,647 -- -- 2,647
Interest Income. . . . . . . . . . . . . . . . 804 -- -- 804
Interest Expense. . . . . . . . . . . . . . . . (1,586) (236) (5,529)(d) (7,643)
(292)(e)
Exchange Rate Gain. . . . . . . . . . . . . . . 148 -- -- 148
Other, net. . . . . . . . . . . . . . . . . . . (59) -- -- (59)
---------- ------------ --------------- ----------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . 8,746 (1,151) (5,039) 2,556
INCOME TAX EXPENSE (BENEFIT). . . . . . . . . . . . 3,061 -- (2,166)(f) 895
---------- ------------ --------------- ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . 5,685 (1,151) (2,873) 1,661
DIVIDENDS APPLICABLE TO PREFERRED
STOCK. . . . . . . . . . . . . . . . . . . . . (31) -- -- (31)
---------- ------------ --------------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES . . . . . . . . . $ 5,654 $ (1,151) $ (2,873) $ 1,630
========== ============ =============== ==========
NET INCOME PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . . $ 0.89 $ 0.22 (g)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary. . . . . . . . . . . . . . . . . . . 6,363 943 7,306 (g)
========== =============== ==========
</TABLE>

<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------------
1996 1995
-------- --------
(In thousands, except
per share amounts)
(Unaudited)
<S> <C> <C>
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,263 $ 38,341
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS . . . . . . . . . . . . . 1,661 (7,143)
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . 1,661 (7,143)
NET INCOME (LOSS) PER SHARE. . . . . . . . . . . . . . . . . . . . $ 0.22 $ (1.60)

</TABLE>

9
<PAGE> 10
PRO FORMA ADJUSTMENTS

The unaudited Pro Forma Consolidating Statement of Operations reflects the
following adjustments:

(a) To reverse management fee revenue applicable to activities of
Southwestern which are not part of the acquisition.

(b) To reverse charter hire expense applicable to activities of
Southwestern which are not part of the acquisition.

(c) To adjust depreciation expense for the Southwestern Rigs using the
estimated purchase price allocated to each rig. Depreciation is
calculated over a 15 year life with an estimated salvage value of
10%. To provide for any deterioration that may occur while the rigs
are not operating for an extended period of time, a minimum
depreciation charge is provided at a reduced rate of 25% of the
normal depreciation rate. Depreciation has been suspended during
refurbishment periods.

(d) To record interest expense related to the $150 million of 10.25%
Senior Notes due 2003, net of interest capitalized during jack-up
drilling rig refurbishment periods.

(e) To record the non-cash amortization of debt issue costs.

(f) To adjust income taxes as a result of pre-tax pro forma adjustments
to reflect a 35% effective tax rate.

(g) Earnings per share has been calculated based on the Company's
weighted average number of common and common equivalent shares
outstanding plus the number of shares of Common Stock issued in
connection with the acquisition of the Southwestern Rigs.

10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Activity in the contract drilling industry and related oil service businesses
has shown signs of improvement over the last two years due to increased
worldwide demand stemming from higher levels of pricing for oil and natural gas.
Over the past several years, the supply of offshore drilling rigs has declined
while the demand for such rigs has increased, resulting in increases in
worldwide utilization rates. The financial condition and results of operations
of the Company and other drilling contractors are dependent upon the price of
oil and natural gas, as demand for their services is primarily dependent upon
the level of spending by oil and gas companies for exploration, development and
production activities. Crude oil and natural gas prices have continued to
fluctuate over the last several years. This price volatility creates some market
uncertainties, despite the overall improvement in oil and gas market
fundamentals.

The oil and gas industry has experienced extreme market cycles over the past
decade. The Company has endeavored to mitigate the effect of this volatility by
diversifying its scope of operations. To achieve its strategic objective, the
Company established separate but related lines of business in daywork drilling,
engineering services and MOPU operations. The Company also has pursued foreign
drilling and production opportunities in order to expand geographically. Each of
the Company's business segments will continue to be affected, however, by the
unsettled energy markets, which are influenced by a variety of factors,
including general economic conditions, the extent of worldwide oil and gas
production and demand therefor, government regulations and environmental
concerns.

RESULTS OF OPERATIONS

Three Months Ended June 30, 1996 and 1995

The Company recognized net income, before preferred dividends, of $2.0 million
during the second quarter of 1996 compared to a net loss of $.8 million in the
second quarter of 1995. Operating income increased $3.5 million despite a $.2
million reduction in revenues in the second quarter of 1996 compared to the same
period in 1995. Improved operating results from each of the Company's business
segments contributed to the increase in operating income. Daywork drilling
operating income increased $2.3 million, engineering services operating income
increased $.9 million and MOPU operating income increased $.6 million. Of the
$2.3 million increase in daywork drilling operating income, $1.9 million was
generated from 8 of 11 jack-up drilling rigs acquired in May, 1996.

11
<PAGE> 12

<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling . . . . . . . . . . . . . . . . . $ 12,647 $ 8,324 $ 4,323
Engineering Services . . . . . . . . . . . . . . 887 5,145 (4,258)
MOPU Operations . . . . . . . . . . . . . . . . . 1,329 1,190 139
Oil and Gas . . . . . . . . . . . . . . . . . . . . 239 401 (162)
Eliminations . . . . . . . . . . . . . . . . . . . (1,324) (1,107) (217)
------------- ------------- -------------
Consolidated . . . . . . . . . . . . . . . . . $ 13,778 $ 13,953 $ (175)
============= ============= ============
Operating Income (Loss):
Daywork Drilling . . . . . . . . . . . . . . . . $ 3,342 $ 1,015 $ 2,327
Engineering Services . . . . . . . . . . . . . . (106) (1,033) 927
MOPU Operations . . . . . . . . . . . . . . . . . 969 392 577
Oil and Gas . . . . . . . . . . . . . . . . . . . . (290) (94) (196)
Corporate Office . . . . . . . . . . . . . . . . (1,444) (1,290) (154)
Eliminations . . . . . . . . . . . . . . . . . . . (10) -- (10)
------------- ------------- -------------
Consolidated . . . . . . . . . . . . . . . . . $ 2,461 $ (1,010) $ 3,471
============= ============= ============
</TABLE>

Daywork Drilling

Daywork drilling revenues increased $4.3 million and operating income increased
$2.3 million in the second quarter of 1996 compared to the second quarter of
1995. Daywork drilling operating results reflect increased revenues and
operating income primarily due to contributions from 8 of 11 jack-up drilling
rigs acquired in May, 1996 and from Cliffs Drilling Rig 54, a 3000 HP land
drilling rig which began operations during the third quarter of 1995. The
second quarter results for 1996 include contributions from the acquired rigs
from the date of acquisition, May 23, 1996, to the end of the second quarter.
These increases in operating income were offset in part by the loss of the
jack-up drilling rig MARQUETTE during 1995.

On May 23, 1996, the Company completed the acquisition of 9 jack-up drilling
rigs and a 50% interest in a joint venture which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. In addition,
on May 10, 1996, the Company acquired the Diamond Rig and renamed it Cliffs
Drilling No. 155. Seven of the 11 jack-up drilling rigs are currently operating
in the Gulf of Mexico, one rig is operating in Qatar, one rig is operating in
Trinidad and the other 2 jack-up drilling rigs are being refurbished. Of the 2
units being refurbished, one is scheduled to commence operations in Venezuela
during the third quarter and the other in the U.S. Gulf of Mexico during the
fourth quarter, respectively.

On July 2, 1995, the jack-up drilling rig MARQUETTE suffered hull damage during
demobilization from Venezuela to the U.S. Gulf of Mexico. During an inspection
of the hull damage by the Company and its insurance adjuster, other damage was
discovered which was attributed to an earthquake in Venezuela in May, 1994. The
rig was declared a compromised total loss by the Company's insurance
underwriters. The Company received $14.6 million from its insurance
underwriters for these damages. The Company has scrapped the rig and salvaged
various rig equipment for use on other rigs or to sell. See "Liquidity and
Capital Resources."

One of the Company's jack-up drilling rigs is currently bareboat chartered for
use as a workover rig in the U.S. Gulf of Mexico. Another jack-up drilling rig
completed repairs and upgrade during June and commenced drilling operations in
Colombia. All 6 of the Company's land drilling rigs are currently under
contract in Venezuela. Contracts on 2 of the 5 land drilling rigs working for
Corpoven, S.A. ("Corpoven") extend into September, 1996, and the other 3 land
drilling rigs have contracts or agreements which extend into February, 1997.
The other land drilling rig, Cliffs Drilling No. 54, is currently drilling the
second well of a 2 well contract. The Company recently entered into

12
<PAGE> 13
an agreement to extend the contract for Cliffs Drilling No. 54 for an additional
nine months. See "Liquidity and Capital Resources."

Engineering Services

Engineering services revenues decreased $4.3 million and operating losses
decreased $.9 million in the second quarter of 1996 compared to the second
quarter of 1995. No turnkey contracts were completed during the second quarter
of 1996 compared to two turnkey contract completions in the same period in 1995.
The $1.0 million operating loss reported in the second quarter of 1995 was
primarily attributable to losses incurred on 2 turnkey drilling contracts
completed during the quarter and to the accrual of $.5 million for an expected
loss on a turnkey drilling contract in progress at June 30, 1995.

As of June 30, 1996, the Company had 4 turnkey wells in progress, including 2
wells in Venezuela and 2 wells in the United States.

MOPU Operations

MOPU revenues increased $.1 million and operating income increased $.6 million
in the second quarter of 1996 compared to the second quarter of 1995. The
increases in revenues and operating income were primarily due to operations
associated with the LANGLEY, which did not operate during the second quarter of
1995, offset in part by reduced operating results from 2 idle MOPUs which were
under operating or standby contracts in the second quarter of 1995.

The Company owns 5 MOPUs, 2 of which are currently under contract. The LANGLEY
is bareboat chartered to Sedco Forex International, Inc. ("Sedco") for a
five-year term for use as a MOPU offshore Nigeria. Sedco plans to mobilize the
MOPU to Nigeria after completion of modifications during the third quarter of
1996. The Company is receiving a standby rate for the unit while it is being
modified. Sedco has an option to purchase the rig at the end of the five-year
charter. The other unit is operating under a month-to-month contract.

Cliffs Drilling No. 11 was bareboat chartered beginning June, 1994 for use as a
workover rig in the U.S. Gulf of Mexico and completed its two-year charter
during June, 1996. The charterer exercised its option to purchase the rig at the
end of the charter, resulting in a pre-tax gain of $2.7 million during the
second quarter of 1996.

Oil and Gas

Oil and gas revenues decreased $.2 million in the second quarter of 1996
compared to the second quarter of 1995, primarily due to decreased gas
production, offset in part by increased oil and gas prices during the second
quarter of 1996 compared to the same period in 1995. Operating losses increased
$.2 million during the same period, primarily due to increased operating
expenses attributable to workovers completed during the quarter.

Corporate Overhead

Corporate overhead increased $.2 million in the second quarter of 1996 compared
to the second quarter of 1995. The increase was primarily due to increased costs
associated with the Southwestern operations.

Other Income (Expense) and Income Taxes

The Company recognized $.5 million of other expense during the second quarter of
1996 compared to $.2 million of other income during the same period in 1995. The
net increase in other expenses resulted primarily from interest expense
associated with the 10.25% Senior Notes, foreign currency exchange rate losses
and income taxes, offset in part by the gain on disposition of the Cliffs
Drilling No. 11. See "Liquidity and Capital Resources."

13
<PAGE> 14
Six Months Ended June 30, 1996 and 1995

The Company recognized net income, before preferred dividends, of $5.7 million
in the first six months of 1996 compared to net income of $.3 million during the
same period in 1995. Revenues increased $14.6 million and operating income
increased $6.4 million in the first half of 1996 compared to the same period in
1995. The increases in both revenues and operating income relate primarily to
improved operating results from the Company's daywork drilling and engineering
services business segments.

<TABLE>
<CAPTION>
INCREASE
1996 1995 (DECREASE)
------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling . . . . . . . . . . . . . . . $ 19,560 $ 14,977 $ 4,583
Engineering Services . . . . . . . . . . . . . . 24,581 12,193 12,388
MOPU Operations . . . . . . . . . . . . . . . . . 2,321 2,475 (154)
Oil and Gas . . . . . . . . . . . . . . . . . . . . 638 791 (153)
Eliminations . . . . . . . . . . . . . . . . . . . (4,244) (2,201) (2,043)
------------- ------------- -------------
Consolidated . . . . . . . . . . . . . . . . . $ 42,856 $ 28,235 $ 14,621
============= ============= =============
Operating Income (Loss):
Daywork Drilling . . . . . . . . . . . . . . . . $ 4,079 $ 1,516 $ 2,563
Engineering Services . . . . . . . . . . . . . . 4,123 740 3,383
MOPU Operations . . . . . . . . . . . . . . . . . 1,648 957 691
Oil and Gas . . . . . . . . . . . . . . . . . . . . (160) (140) (20)
Corporate Office . . . . . . . . . . . . . . . . (2,868) (2,665) (203)
Eliminations . . . . . . . . . . . . . . . . . . . (30) -- (30)
------------- ------------- -------------
Consolidated . . . . . . . . . . . . . . . . . $ 6,792 $ 408 $ 6,384
============= ============= =============

</TABLE>

Daywork Drilling

Daywork drilling operating results reflect increased revenues and operating
income primarily due to contributions from 8 of 11 jack-up drilling rigs
acquired in May, 1996 and from Cliffs Drilling Rig 54, a 3000 HP land drilling
rig which began operations during the third quarter of 1995. The first six
months results for 1996 include contributions from the acquired rigs from the
date of acquisition, May 23, 1996, through June 30, 1996. These increases in
operating income were offset in part by the loss of the jack-up drilling rig
MARQUETTE during 1995.

On May 23, 1996, the Company completed the acquisition of 9 jack-up drilling
rigs and a 50% interest in a joint venture which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. In addition,
on May 10, 1996, the company acquired the Diamond Rig and renamed it Cliffs
Drilling No. 155. Seven of the 11 jack-up drilling rigs are currently operating
in the Gulf of Mexico, one rig is operating in Qatar, one rig is operating in
Trinidad and the other 2 jack-up drilling rigs are being refurbished. Of the 2
units being refurbished, one is scheduled to commence operations in Venezuela
during the third quarter and the other in the U.S. Gulf of Mexico during the
fourth quarter, respectively.

One of the Company's jack-up drilling rigs is currently bareboat chartered for
use as a workover rig in the U.S. Gulf of Mexico. Another jack-up drilling rig
completed repairs and upgrade during June

14
<PAGE> 15
and commenced drilling operations in Colombia. All 6 of the Company's land
drilling rigs are currently under contract in Venezuela. Contracts on 2 of the 5
land drilling rigs working for Corpoven extend into September, 1996, and the
other 3 land drilling rigs have contracts or agreements which extend into
February, 1997. The other land drilling rig, Cliffs Drilling No. 54, is
currently drilling the second well of a 2 well contract. The Company recently
entered into an agreement to extend the contract for Cliffs Drilling No. 54 for
an additional nine months. See "Liquidity and Capital Resources."

Engineering Services

Engineering services revenues increased $12.4 million and operating income
increased $3.4 million in the first six months of 1996 compared to the same
period in 1995. Four turnkey contracts were completed during the first six
months of 1996 compared to three turnkey contract completions in the same period
in 1995. Two of the 4 contracts completed during the first six months of 1996
were international contracts in Venezuela, which generally generate greater
revenues and operating income than domestic contracts. Operating income for the
first six months of 1995 was reduced by $.7 million of losses incurred on 2
completed turnkey drilling contracts and the accrual of $.5 million for an
expected loss on one turnkey drilling contract in progress at June 30, 1995.

As of June 30, 1996, the Company had 4 turnkey wells in progress, including 2
wells in Venezuela and 2 wells in the United States.

MOPU Operations

MOPU operating income increased $.7 million in the first six months of 1996
compared to the same period in 1995 despite a $.2 million reduction in revenues.
The variances in revenues and operating income were primarily due to operations
associated with the LANGLEY, which did not operate during the first six months
of 1995, offset in part by reduced operating results from 2 idle MOPUs which
were under operating or standby contracts in the first six months of 1995.

The Company owns 5 MOPUs, 2 of which are currently under contract. The LANGLEY
is bareboat chartered to Sedco for a five-year term for use as a MOPU offshore
Nigeria. Sedco plans to mobilize the MOPU to Nigeria after completion of
modifications during the third quarter of 1996. The Company is receiving a
standby rate for the unit while it is being modified. Sedco has an option to
purchase the rig at the end of the five-year charter. The other unit is
operating under a month-to-month contract.

Oil and Gas

Oil and gas revenues decreased $.2 million in the first six months of 1996
compared to the first six months of 1995, primarily due to decreased gas
production, offset in part by increased gas prices during the first six months
of 1996 compared to the same period in 1995. Operating losses increased slightly
during the same period, primarily due to the revenue decrease and increased
operating expenses associated with workovers completed during 1996.

Corporate Overhead

Corporate overhead increased $.2 million in the first six months of 1996
compared to the same period in 1995. The increase was primarily due to increased
costs associated with the Southwestern operations.

15
<PAGE> 16
Other Income (Expense) and Income Taxes

The Company recognized $1.1 million of other expense during the first six
months of 1996 compared to $.1 million of other expense during the same period
in 1995. The net increase in other expenses resulted primarily from interest
expense associated with the 10.25% Senior Notes and income taxes, offset in
part by the gain on disposition of the Cliffs Drilling No. 11. See "Liquidity
and Capital Resources."

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents increased $19.2 million from $26.4
million at December 31, 1995 to $45.6 million at June 30, 1996. The increase
resulted from net cash provided by financing activities of $143.8 million,
offset in part by net cash used in investing activities of $120.1 million and
net cash used in operating activities of $4.5 million.

Operating Activities

Net cash of $4.5 million used to fund operating activities included $11.3
million used for working capital and other requirements. "Accounts Receivable"
increased from December 31, 1995 to June 30, 1996 due primarily to daywork
drilling receivables associated with the Southwestern Rigs acquired on May 23,
1996 and the timing of cash receipts related to international daywork and
turnkey operations. "Notes and Other Receivables, Current" increased primarily
due to an insurance claim related to a turnkey well in progress at June 30,
1996 and the receipt of a note related to the sale of one of the Company's
MOPUs, Cliffs Drilling No. 11. "Drilling Contracts in Progress" and "Accounts
Payable" decreased primarily due to the completion of 4 turnkey contracts which
were in progress at December 31, 1995. "Accrued Interest" and "Other Accrued
Expenses" increased primarily as a result of the acquisition of the
Southwestern Rigs completed on May 23, 1996.

Investing Activities

Net cash of $120.1 million used to fund investing activities included $118.6
million of capital expenditures, primarily for the jack-up drilling rig
acquisitions completed during May, 1996 and related rig refurbishments. In
addition, cash was used for upgrade and renovation activities on the jack-up
drilling rig LASALLE and the LANGLEY. The Company has plans for other capital
expenditures totaling approximately $33.0 million during 1996, including $15.0
million for the potential acquisition of additional land drilling rigs for use
in Venezuela. The Company intends to fund these capital expenditure
requirements with the remaining proceeds from the $150 million debt offering,
internally-generated cash flow and amounts currently available under its
Revolving Credit Facility.

"Investments in and Advances to Unconsolidated Affiliates" increased from
December 31, 1995 to June 30, 1996 due to the $3.2 million use of cash for the
acquisition of an equity interest in a joint venture that owns one jack-up
drilling rig in May, 1996.

On May 23, 1996, the Company completed the acquisition of 9 jack-up drilling
rigs and a 50% interest in a joint venture which owns an additional jack-up
drilling rig, and their related assets operated by Southwestern. The purchase
price of the Southwestern Rigs was (a) $103.8 million in cash (after reductions
of $6.2 million for required refurbishments of certain Southwestern Rigs not
made prior to closing) plus (b) issuance of 1.2 million shares of Common Stock
of the Company and (c) assumption of certain contractual liabilities, including
the Company's guarantee of $4.25 million in indebtedness of the Joint Venture
to Citibank N.A. related to the refurbishment of the jack-up drilling rig owned
by the Joint Venture (together with accrued by unpaid interest thereon and
costs of collection).

In part to finance the acquisition of the Southwestern Rigs, the Company sold
$150 million of 10.25% Senior Notes due 2003 in a private placement. Interest
on the Notes accrues from May

16
<PAGE> 17
23, 1996 and will be payable semi-annually in cash in arrears on May 15 and
November 15 of each year, commencing November 15, 1996. Of the $144.8 million
net proceeds received by the Company in connection with the sale of the Notes,
$103.8 million was used to fund the cash portion of the purchase price for the
Southwestern Rigs and $6.2 million has been reserved to complete refurbishments
of 2 rigs not completed by Sellers prior to closing. The Company has allocated
$12 million of the net proceeds from the sale of the Notes for the acquisition
and refurbishment of the Diamond Rig. The remaining proceeds will be used for
general corporate purposes which may include up to $15 million to acquire land
rigs for use in Venezuela.

In addition, on May 10, 1996, the Company acquired the jack-up drilling rig
OCEAN MAGALLANES (the "Diamond Rig") from Diamond Offshore Southern Company for
$4.5 million. The Company has renamed this unit CLIFFS DRILLING NO. 155. The
Company intends to refurbish, upgrade and mobilize the Diamond Rig to Venezuela
at an additional cost estimated at $7.5 million. The Company signed a letter of
intent with Maraven S.A. for the Diamond Rig and expects to sign an initial
eight-month contract with Maraven for use of the unit in Lake Maracaibo,
Venezuela.

On June 19, 1996, Cliffs Drilling No. 11 completed its two-year bareboat charter
as a workover rig in the U.S. Gulf of Mexico. The charterer exercised its option
to purchase the unit for $5.4 million and executed a note payable to the Company
maturing on October 31, 1996. Interest accrues at $2,500 per day and the note is
secured by the rig and related equipment. The Company recognized a $2.7 million
gain on disposition of the unit in June, 1996.

Financing Activities

Cash of $143.8 million was provided by the placement of $150.0 million of 10.25%
Senior Notes, offset in part by cash used to fund debt issue costs and payments
associated with the redemption of Preferred Stock and the acquisition of
treasury stock.

On January 17, 1996, the Company issued 2,113,557 shares of Common Stock upon
conversion of 1,115,988 shares of its 1,150,000 issued and outstanding shares of
Preferred Stock. The remaining 34,012 shares were redeemed for cash in the
amount of $25.69 per share plus $0.22 per share in accrued dividends thereon at
a cost to the Company of approximately $.9 million.

On June 27, 1996, the Company and ING modified and amended the Company's $20.0
million Revolving Credit Facility to, among other things, increase the amount
available under such facility to $35 million. The Revolving Credit Facility
matures on May 31, 1998. At June 30, 1996, the Company had no indebtedness
outstanding under the Revolving Credit Facility.

Exchange Gains and Losses

Approximately 60% of the Company's revenues and a substantial portion of its
operating income were sourced from its Venezuelan operations during the first
six months of 1996. These operations are subject to customary political and
foreign currency risks in addition to operational risks. The Company has
attempted to reduce these risks through insurance and the structure of its
contracts. The Company may be exposed to the risk of foreign currency losses in
connection with its foreign operations. Such losses are the result of holding
net monetary assets (cash and receivables in excess of payables) denominated in
foreign currencies during periods of a strengthening U.S. dollar. The Company's
foreign exchange gains and losses are primarily attributable to the Venezuelan
Bolivar. Venezuela instituted currency exchange controls during June, 1994,
which continued through all of 1995 and substantially eliminated exchange losses
attributable to the Company's Venezuelan operations during most of 1995. The
Company realized $1.2 million in gains in connection with Venezuelan Brady Bond
transactions during the first quarter of 1996; however, the Venezuelan
government allowed the Bolivar to "float" relative to other currencies on April
22, 1996. Significant devaluation of the Bolivar has occurred since that date,
which subjects the Company to exchange losses on its net monetary assets.
Foreign currency exchange rate

17
<PAGE> 18
losses of $1.0 million incurred during the second quarter of 1996 offset
exchange gains during the first quarter of 1996. The effects of these
transactions are reported as "Exchange Rate Gain (Loss)" in the Consolidated
Statements of Operations. The Company does not speculate in foreign currencies
or maintain significant foreign currency cash balances. The Company will
continue to be exposed to future foreign currency gains and losses if the
currency continues to be volatile. Despite the political and economic risks in
Venezuela, the Company believes that the country continues to be a favorable
market for its services.

The ability of the Company to fund working capital, capital expenditures and
debt service in excess of cash on hand will be dependent upon the success of
the Company's domestic and foreign operations. To the extent that internal
sources are insufficient to meet those cash requirements, the Company can draw
on its available credit facility or seek other debt or equity financing;
however, the Company can give no assurance that such other debt or equity
financing would be available on terms acceptable to the Company.

In any case, the satisfaction of long-term capital requirements will depend
upon successful implementation by the Company of its business strategy and
future results of operations. Management believes it has successfully
implemented the strategy to achieve results of operations commensurate with its
immediate and near-term liquidity requirements.

18
<PAGE> 19
PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company's Annual Meeting of Shareholders was held on May 22, 1996, at which
the shareholders voted on the election of two directors, the proposed amendment
to the Company's 1988 Incentive Equity Plan and the appointment of the Company's
independent public accountants. Of the 5,209,869 shares of Common Stock present
in person or by proxy, 5,207,173 shares were voted for the election of Douglas
E. Swanson as a director and 5,207,016 shares were voted for the election of
Robert M. McInnes as a director, with 2,696 and 2,853 shares withheld,
respectively; 3,781,508 shares were voted for the proposed amendment to the
Company's 1988 Incentive Equity Plan, while 1,026,179 shares were voted against
the proposed amendment with 402,182 shares abstaining; and 5,206,248 shares were
voted for the appointment of Ernst & Young LLP as the Company's independent
public accountants for 1996, while 2,848 shares were voted against such
appointment with 773 shares abstaining. Directors whose terms of office
continued were H. Robert Hirsch, Randolph Newcomer, Joseph E. Reid, Michael M.
Cone and John D. Weil.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.13.4 Fourth Amendment to Second Restated Credit Agreement
dated as of June 27,1996, by and among the Company,
Cliffs Oil and Gas Company, Cliffs Drilling
International, Inc., Southwestern Offshore Corporation,
DRL, Inc. and ING.

27 Financial Data Schedule

(b) Reports on Form 8-K

One report dated May 23, 1996 was filed by the Company on Form 8-K
during the three months ended June 30, 1996 which announced the
completion of the Southwestern Rigs acquisition, the Diamond Rig
acquisition and consummation of the related financing.

19
<PAGE> 20
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.

CLIFFS DRILLING COMPANY

Date: August 7, 1996 By: /s/ Edward A. Guthrie
---------------------------- -------------------------------
Edward A. Guthrie
Vice President - Finance

Date: August 7, 1996 By: /s/ Cindy B. Taylor
---------------------------- -------------------------------
Cindy B. Taylor
Vice President - Controller

20
<PAGE> 21
EXHIBIT INDEX

10.13.4 Fourth Amendment to Second Restated Credit Agreement dated as
of June 27, 1996, by and among the Company, Cliffs Oil and Gas
Company, Cliffs Drilling International, Inc., Southwestern
Offshore Corporation, DRL, Inc. and ING.

27 Financial Data Schedule

<PAGE> 1
EXHIBIT 10.13.4

Execution

FOURTH AMENDMENT TO SECOND RESTATED
CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO SECOND RESTATED CREDIT AGREEMENT (herein
called this "Amendment") made as of the 27th day of June, 1996 by and among
Cliffs Drilling Company, a Delaware corporation ("Borrower"), Cliffs Oil and
Gas Company, a Delaware corporation ("COG"), Cliffs Drilling International,
Inc., a Delaware corporation ("CDI"), Southwestern Offshore Corporation, a
Delaware corporation ("SOC"), DRL, Inc., a Delaware corporation ("DRL") and
Internationale Nederlanden (U.S.) Capital Corporation, a Delaware corporation
("Lender"),

W I T N E S S E T H:

WHEREAS, Borrower, COG, CDI and Lender have entered into that certain
Second Restated Credit Agreement dated as of March 28, 1994, as amended by that
certain First Amendment to Second Restated Credit Agreement dated as of May 17,
1994, by that certain Second Amendment to Second Restated Credit Agreement
dated as of September 26, 1995, and by that certain Third Amendment to Second
Restated Credit Agreement dated as of December 19, 1995 (as so amended, the
"Original Agreement") for the purposes and consideration therein expressed,
pursuant to which Lender made, and became obligated to make, loans to Borrower
as therein provided; and

WHEREAS, SOC and DRL will each directly or indirectly benefit from the
transactions contemplated by the Original Agreement, as amended hereby; and

WHEREAS, Borrower and Lender desire to amend the Original Agreement
to, among other things, reflect that SOC and DRL have guaranteed the
obligations of Borrower to Lender;

NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Lender to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:

ARTICLE I.

Definitions and References

Section 1.1 Terms Defined in the Original Agreement. Unless the
context otherwise requires or unless otherwise expressly defined herein, the
terms defined in the Original Agreement shall have the same meanings whenever
used in this Amendment.

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<PAGE> 2
Section 1.2. Other Defined Terms. Unless the context otherwise
requires, the following terms when used in this Amendment shall have the
meanings assigned to them in this Section 1.2.

"Amendment" means this Fourth Amendment to Second Restated
Credit Agreement.

"Amendment Documents" means this Amendment and each of the
other documents and instruments listed on Schedule 1 attached hereto.

"Credit Agreement" means the Original Agreement as amended
hereby.

"Renewal Note" has the meaning given such term in Section 3.1.

"Southwestern Rigs" means, collectively, the Southwestern 100,
the Southwestern 150, the Southwestern 151, the Southwestern 152, the
Southwestern 153, the Southwestern 154, the Southwestern 160, the
Southwestern 180, and the Southwestern 200.

ARTICLE II.

Amendments to Original Agreement

Section 2.1. Definitions. The following definition of "Asset Sale"
is hereby added to Section 1.1 of the Original Agreement immediately following
the definition of "Applicable Lending Office":

"`Asset Sale' shall mean any sale, issuance, conveyance,
transfer, lease or other disposition (including any sale/leaseback
transaction or a merger or consolidation) (collectively for purposes
of this definition, a `transfer'), directly or indirectly, in one or a
series of related transactions, of (a) any Capital Stock of any
Related Person held by Borrower or any other Related Person, (b) all
or substantially all of the Properties of any division or line of
business of Borrower or any other Related Person or (c) any other
Properties of Borrower or any other Related Person other than
transfers of cash, Cash Equivalents, Investments permitted by clause
(B) of Section 6.11, accounts receivable, hydrocarbons or other
Properties in the ordinary course of business. For purposes of this
definition, the term `Asset Sale' also shall not include any of the
following (i) any transfer of Properties (including Capital Stock)
which is governed by, and made in accordance with, the provisions of
Article VIII of the Indenture; (ii) any transfer of Properties to an
Unrestricted Subsidiary (as defined in the Indenture), if permitted
under Section 10.10 of the Indenture; (iii) sales of damaged, worn-out
or obsolete equipment or assets that, in Borrower's reasonable
judgment, are either (x) no longer used or (y) no longer useful in the
business of Borrower or the other Related Persons; (iv) any charter
(bareboat or otherwise) or other lease of any Property entered into in
the ordinary course of business and with respect to

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<PAGE> 3
which Borrower or any other Related Person is the lessor, except any
such charter or lease that provides for the acquisition of such
Property by the lessee during or at the end of the term thereof for an
amount that is less than the fair market value thereof at the time the
right to acquire such Property is granted; (v) any trade or exchange
by Borrower or any other Related Person of one or more offshore
drilling rigs for one or more other offshore drilling rigs owned or
held by another Person, provided that (x) the fair value of the
offshore drilling rig or rigs traded or exchanged by Borrower or such
Related Person (including any cash or Investments permitted by clause
(B) of Section 6.11 to be delivered by Borrower or such Related Person)
is reasonably equivalent to the fair value of the offshore drilling
rig or rigs (together with any cash or cash equivalents) to be
received by Borrower or such Related Person as determined by written
appraisal by a nationally recognized investment banking firm or
appraisal firm, in either case specializing or having a specialty in
offshore drilling rigs, and (y) such exchange is approved by a
majority of the Directors of Borrower who do not have any material
direct or indirect financial interest with respect to such exchange;
(vi) any transfer by Borrower or any other Related Person to its
customers of drill pipe and associated drilling equipment utilized in
connection with a drilling contract for the employment of a drilling
rig in the ordinary course of business and consistent with past
practice; and (vii) any transfers that, but for this clause (vii)
would be Asset Sales, if (A) Borrower elects to designate such
transfers as not constituting Assets Sales and (b) after giving effect
to such transfers, the aggregate fair market value of the Properties
transferred in such transaction or any such series of related
transactions so designated by Borrower does not exceed $500,000."

The definition of "Available Revolving Credit Commitment" is hereby
amended in its entirety to read as follows:

"`Available Revolving Credit Commitment' shall mean, at a
particular date, an amount equal to the remainder, if any, of (a) the
lesser of the Revolving Credit Commitment or the Borrowing Base then
in effect minus (b) the sum of (i) the Revolving Credit Loan Balance
at such date plus (ii) the L/C Exposure at such date plus (iii) the
Hydrocarbon Exposure at such date."

The definition of "Base Rate Margin" in the definition of "Base Rate"
is hereby amended in its entirety to read as follows:

"`Base Rate Margin' means with respect to the Revolving Credit
Note and Revolving Credit Loans, (i) .25% per annum or (ii) during any
Interest Adjustment Period, .75% per annum."

The definition of "Borrowing Base" in Section 1.1 of the Original
Agreement is hereby amended in its entirety to read as follows:

"`Borrowing Base' shall mean, at a particular date and as
established pursuant to Section 2.1.7, the sum of (a) 80% of Eligible
Accounts at such date,

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<PAGE> 4
plus (b) the Oil and Gas Reserves at such date, plus (c) 80% of the
Eligible Turnkey Drilling Contract Amounts, plus (d) 50% of Fleet
Value, plus (e) 50% of West Indies Equity (but in no event to be less
than zero), minus (f) Guaranty Liabilities; provided, however, the
amount of the Borrowing Base derived from the Eligible Accounts, Oil
and Gas Reserves or Eligible Turnkey Drilling Contract Amounts owned
by COG, CDI, SOC or DRL, respectively, shall not exceed the limitation
of liability in the guaranty of such Related Person. For purposes of
this definition, the term `Guaranty Liabilities' shall at a particular
date mean the outstanding principal amount of Indebtedness of West
Indies Drilling Joint Venture (`West Indies Drilling') to Citibank
N.A. that is guaranteed by Borrower. The term `West Indies Equity'
shall at a particular date mean SOC's ownership percentage of the
shareholders' equity of West Indies Drilling calculated in accordance
with GAAP, provided that in such calculation, (i) the value of any
drilling rig owned by West Indies Drilling shall be at the lower of
cost or the value attributed at such particular date to the drilling
rig in a published report by Jefferies & Companies, William McKay &
Gordon, or such other analyst of the market value of drilling rigs as
is reasonably acceptable to Lender and (ii) no value shall be given to
intangible assets (including such assets as patents, copyrights,
licenses, franchises, goodwill, trade names, trade secrets and leases
other than oil, gas or mineral leases or leases required to be
capitalized under GAAP), provided further SOC's ownership interest in
West Indies Drilling shall be free and clear of any Liens, except
Liens in favor of Lender."

The following definition of "Capital Stock" is hereby added to Section
1.1 of the Original Agreement immediately following the definition of "Business
Day":

"`Capital Stock' shall mean, with respect to any Person, any
and all shares, interests, participations, rights in or other
equivalents in the equity interests (however designated) in such
Person, and any rights (other than debt securities convertible into an
equity interest) warrants or options exercisable for, exchangeable for
or convertible into such an equity interest in such Person."

The following definition of "Change of Control" is hereby added to
Section 1.1 of the Original Agreement immediately following the definition of
"Cerrito Note":

"`Change of Control' shall mean the occurrence of any event or
series of events by which: (a) any `person' or `group' (as such terms
are used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended from time to time, the `Exchange Act') is or becomes
the `beneficial owner' (as defined in Rule 13d- 3 under the Exchange
Act), directly or indirectly, of more than 50% of the total Voting
Stock of Borrower; (b) Borrower consolidates with or merges into
another Person or any Person consolidates with, or merges into,
Borrower, in any such event pursuant to a transaction in which the
outstanding Voting Stock of Borrower is changed into or exchanged for
cash, securities or other property, other than any such transaction
where (i) the outstanding Voting Stock of Borrower is changed into or
exchanged for Voting Stock of the surviving or

-4-
<PAGE> 5
resulting Person that is Qualified Capital Stock and (ii) the holders
of the Voting Stock of Borrower immediately prior to such transaction
own, directly or indirectly, not less than a majority of the Voting
Stock of the surviving or resulting Person immediately after such
transaction; (c) Borrower, either individually or in conjunction with
one or more of its Subsidiaries, sells, assigns, conveys, transfers,
leases or otherwise disposes of, or Borrower's Subsidiaries sell,
assign, convey, transfer, lease or otherwise dispose of, all or
substantially all of the properties of Borrower and its Subsidiaries,
taken as a whole (either in one transaction or a series of related
transactions), including Capital Stock of Borrower or its
Subsidiaries, to any Person (other than Borrower or a wholly owned
Subsidiary of Borrower); (d) during any consecutive two-year period,
individuals who at the beginning of such period constituted the board
of directors of Borrower (together with any new directors whose
election by such board of directors or whose nomination for election
by the stockholders of Borrower was approved by a vote of a two-thirds
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the board of directors of Borrower then in office; or (e)
the liquidation or dissolution of Borrower. `Voting Stock' means any
class or classes of Capital Stock pursuant to which the holders
thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or
trustees of any Person (irrespective of whether or not, at the time,
stock of any other class or classes shall have, or might have, voting
power by reason of the happening of any contingency). `Qualified
Capital Stock' means any Capital Stock that is not required to be
redeemed or repurchased prior to May 15, 2003, is not redeemable at
the option of the holder thereof at any time prior to May 15, 2003,
and is not convertible into or exchangeable for debt securities at any
time prior to May 15, 2003."

The definition of "Consolidated Group" in Section 1.1 of the Original
Agreement is hereby amended in its entirety to read as follows:

"`Consolidated Group' shall mean the Borrower, COG, CDI, SOC,
DRL and their Subsidiaries on a consolidated basis."

The following definition of "DRL" is hereby added to Section 1.1 of
the Original Agreement immediately following the definition of "Dresser-Rand
Contracts":

"`DRL' shall mean DRL Inc., a Delaware corporation."

The following definition of "Event of Loss" is hereby added to Section
1.1 of the Original Agreement immediately following the definition of "Event of
Default"

"`Event of Loss' shall mean with respect to any drilling rig,
MOPU or related Property of any Related Person, (i) any damage to such
drilling rig, MOPU or related Property which results in an insurance
settlement with respect

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<PAGE> 6
thereto on the basis of a total loss or a constructive or compromised
total loss or (ii) the confiscation, documentation or requisition of
title to such drilling rig, MOPU or related Property by any government
or any instrumentality or agency thereof. An Event of Loss shall be
deemed to occur as of the date of the insurance settlement,
confiscation, condemnation or requisition of title, as applicable."

The definition of "Fixed Rate Margin" in the definition of "Fixed
Rate" is hereby amended in its entirety to read as follows:

"`Fixed Rate Margin' means, with respect to the Revolving
Credit Note and Revolving Credit Loans (i) 2.0% per annum or (ii)
during any Interest Adjustment Period, 2.5% per annum."

The definition of "Fleet" in Section 1.1 of the Original Agreement is
hereby amended in its entirety to read as follows:

"`Fleet' shall mean the mobile offshore drilling units, mobile
offshore production units and land drilling rigs, including all
related personal property and equipment, owned by Borrower and
described as follows:

Langley U.S. Official No. 501872
Cliffs LaSalle U.S. Official No. 644595
Cliffs Drilling No. 8 U.S. Official No. 587412
Cliffs Drilling No. 10 U.S. Official No. 601376
Cliffs Drilling No. 12 U.S. Official No. 622669
Cliffs Drilling No. 14 U.S. Official No. 625968
Cliffs Drilling No. 155 U.S. Official No. 621912
Marlin No. 4 (MOPU)
Rig 28 (Land)
Rig 40 (Land)
Rig 41 (Land)
Rig 42 (Land)
Rig 43 (Land)
Rig 54 (Land)
Southwestern 100 Liberian Official No. 9179
Southwestern 150 Liberian Official No. 8909
Southwestern 151 Liberian Official No. 8572
Southwestern 152 Liberian Official No. 8530
Southwestern 153 Liberian Official No. 8353
Southwestern 154 Liberian Official No. 8573
Southwestern 160 Liberian Official No. 6856
Southwestern 180 Liberian Official No. 9792
Southwestern 200 Liberian Official No. 8539

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<PAGE> 7
The definition of "Guarantors" in Section 1.1 of the Original
Agreement is hereby amended in its entirety to read as follows:

"`Guarantors' shall mean COG, CDI, SOC and DRL and any other
Subsidiary of a Related Person that from time to time becomes a party
to this Agreement and to such other Loan Documents as may be requested
by Lender."

The definition of "Hydrocarbon Exposure" is hereby added to Section
1.1 of the Original Agreement immediately following the definition of
"Hazardous Substances":

"`Hydrocarbon Exposure shall mean on any date an amount that
would be payable to Lender or any of its Affiliates by Borrower under
an early termination of any commodity trading transactions then
outstanding."

The following definition of "Indenture" is hereby added to Section 1.1
of the Original Agreement immediately following the definition of
"Indebtedness":

"`Indenture' shall mean that certain Indenture dated as of May
15, 1996, among Cliffs Drilling Company, COG, CDI, SOC, Cliffs
Drilling Merger Company and Fleet National Bank, as Trustee."

The definition of "Interest Adjustment Period" in Section 1.1 of the
Original Agreement is hereby amended in its entirety to read as follows:

"`Interest Adjustment Period' shall mean any calendar quarter
immediately following the end of a calendar quarter on which (i) the
Revolving Credit Loan Balance was not reduced to an outstanding amount
less than $20,000,000 for a period of at least sixty (60) consecutive
calendar days during the immediately preceding twelve calendar months,
and (ii) annual cash flow of the Consolidated Group for the
immediately preceding twelve calendar months is less than:

(a) $20,000,000 calculated as of the end of the second
fiscal quarter of 1996;

(b) $22,500,000 calculated as of the end of the third
fiscal quarter of 1996;

(d) $27,500,000 calculated as of the end of the first
fiscal quarter of 1997; and

(e) $30,000,000 calculated as of the end of the second
fiscal quarter of 1997 and all subsequent quarters.

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<PAGE> 8
For purposes of this definition, `cash flow' shall mean the sum of (a)
net income of the Consolidated Group calculated in accordance with
GAAP, plus (b) expenses of the Consolidated Group that were taken into
account in determining such net income but which did not involve a
current expenditure of funds (such as depreciation, depletion and
amortization)."

The following definition of "Net Available Proceeds" is hereby added
to Section 1.1 of the Original Agreement immediately following the definition
of "Multiparty Agreement":

"`Net Available Proceeds' shall mean, with respect to any
Asset Sale, the proceeds thereof in the form of cash or Investments
permitted by clause (B) of Section 6.11 including payments in respect
of deferred payment obligations when received in the form of cash or
Investments (except to the extent that such obligations are financed
or sold with recourse to Borrower or any other Related Person), net of
(i) brokerage commissions and other fees and expenses (including fees
and expenses of legal counsel, accountants and investment banks)
related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) amounts required to be paid to any
Person (other than any Related Person) owning a beneficial interest in
the Property subject to the Asset Sale or having a Lien thereon and
(iv) appropriate amounts to be provided by Borrower or any other
Related Person, as the case may be, as a reserve required in
accordance with GAAP consistently applied against any liabilities
associated with such Asset Sale and retained by Borrower or any other
Related Person, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such
Asset Sale, all as reflected in a certificate signed by the Chairman
of the Board, the President or a Vice President, and by the Treasurer,
an Assistant Treasurer, the Secretary or an Assistant Secretary of
Borrower (an `Officer's Certificate') delivered to Lender; provided,
however, that any amounts remaining after adjustments, revaluations or
liquidations of such reserves shall constitute Net Available Proceeds.
`Net Available Proceeds' means, with resect to any Event of Loss, the
proceeds to Borrower or any other Related Persons as a result thereof
in the form of cash or Investments permitted by clause (B) of Section
6.11, including insurance proceeds paid to Borrower or any other
Related Person, and all payments received by Borrower or any other
Related Person from any government or any instrumentality or agency
thereof by way of compensation for the requisition of title to
Property, net of all fees and expenses incurred by Borrower or any
other Related Person related to the collection or receipt of such
proceeds, all as reflected in an Officer's Certificate delivered to
Lender."

The definition of "Revolving Credit Commitment" in Section 1.1 of the
Original Agreement is hereby amended in its entirety to read as follows:

"`Revolving Credit Commitment' shall mean the amount of
$35,000,000."

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<PAGE> 9
The definition of "Revolving Credit Commitment Termination Date" in
Section 1.1 of the Original Agreement is hereby amended in its entirety to read
as follows:

"`Revolving Credit Commitment Termination Date' shall mean May
31, 1998 or any extension thereof pursuant to Section 2.1.3 or, if
such date is not a Business Day, the Business Day next preceding such
date, or any earlier date on which the Revolving Credit Commitment has
been reduced to zero by Borrower or has been terminated by Lender
pursuant to Section 7.2."

The following definition of "Senior Unsecured Notes" is hereby added
to the Original Agreement immediately following the definition of "Security
Schedule":

"`Senior Unsecured Notes' shall mean Borrower's 10.25% Senior
Notes due 2003, Series A, and 10.25% Senior Notes due 2003, Series B,
issued pursuant to the Indenture."

The following definitions of "SOC" is hereby added to Section 1.1 of
the Original Agreement immediately following the definition of "Single Employer
Plan":

"`SOC' shall mean Southwestern Offshore Corporation, a
Delaware corporation formerly known as Cliffs Drilling Asset
Acquisition Company."

Section 2.2. Revolving Line of Credit. The following Section
2.1.4.A is hereby added to the Original Agreement immediately following Section
2.1.4.:

"`2.1.4.A Allocation of Revolving Credit to Hedging
Contracts. Upon the terms and conditions and relying on the
representations and warranties contained in this Agreement, Lender
agrees, during the Revolving Credit Commitment Period, to provide, or
to provide through its Affiliates, a counter party exposure line for
commodity trading transactions; provided, however, that on any day (i)
the Hedging Exposure at such date, when added to the Revolving Credit
Loan Balance then outstanding and the L/C Exposure at such date, shall
not exceed the lesser of the Revolving Credit Commitment or the
Borrowing Base then in effect, and (ii) the Hydrocarbon Exposure shall
not exceed $1,000,000.

Section 2.3. Affirmative Covenants. The first sentence of Section
5.16 of the Original Agreement is hereby amended in its entirety to read as
follows:

"Each Related Person agrees to deliver, to further secure the
Obligations whenever requested by Lender in its sole and absolute
discretion, deeds of trust, mortgages, chattel mortgages, security
agreements, financing statements and other Security Instruments in
form and substance satisfactory to Lender for the purpose of granting,
confirming, and perfecting first and prior liens or security interests
in any real or personal property described in the Security Instruments
in existence on June 27, 1996."

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<PAGE> 10
The last sentence of Section 5.18 of the Original Agreement is hereby
amended in its entirety to read as follows:

"The Related Persons hereby agree to indemnify Lender and its
directors, officers, employees and agents for, and hold each of them
harmless against, any and all losses, liabilities, claims, damages or
expenses incurred by any of them arising out of or by reason of any
investigation or litigation or other proceedings (including any
threatened investigation or litigation or other proceedings) relating
to this Agreement, or the Loan Documents, the extensions of credit
hereunder or any actual or proposed use by the Related Persons of the
proceeds of any of the extensions of credit hereunder, including,
without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or
other proceedings. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER
OR NOT SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES ARE IN
ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR
THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY LENDER, BUT SHALL EXCLUDE ANY
SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES INCURRED SOLELY
BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON
TO BE INDEMNIFIED."

Section 2.4. Negative Covenants. Sections 6.1 and 6.2 of the
Original Agreement are hereby amended in their entirety to read as follows:

"`6.1 Indebtedness. No Related Person will create, incur,
assume or suffer to exist any Indebtedness other than that reflected
in the financial statements referred to in Section 4.4 above (and
renewals and extensions of, but not increases to, such Indebtedness)
whether by way of loan or otherwise; provided, however, the foregoing
restriction shall not apply to (a) the Obligations, (b) unsecured
current accounts payable incurred in the ordinary course of business,
that are not unpaid in excess of 90 days beyond invoice date or are
being contested in good faith and as to which such reserve as is
required by GAAP has been made, (c) Indebtedness owed to any other
Consolidated Group Member and (d) Indebtedness of Borrower evidenced
by the Senior Unsecured Notes.

6.2 Contingent Obligations. No Related Person will create,
incur, assume or suffer to exist any Contingent Obligation other than
that reflected in the financial statements referred to in Section 4.4
above (and renewals and extensions of, but not increases to, such
Contingent Obligations) provided, however, the foregoing restriction
shall not apply to (a) performance guarantees and performance, surety
or other bonds provided in the ordinary course of business, (b) trade
credit incurred or operating leases entered into in the ordinary
course of business, (c) guarantees by the Borrower of the obligations
of any joint venture to which any of the Related Persons or any of
their respective Subsidiaries is a joint venturer; (d) the Obligations
(with respect to COG, CDI, SOC and DRL), (e)

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<PAGE> 11
guarantees by COG, CDI, SOC and DRL of the Indebtedness of Borrower
evidenced by the Senior Unsecured Notes or (f) guarantees by Borrower
of the obligations of any of its wholly-owned Subsidiaries; provided,
however, with respect to any Contingent Obligations allowed pursuant
to Section 6.2 (c), such obligations must be related to the types of
business currently being conducted by the Related Persons and such
Contingent Obligations may never exceed in the aggregate $1,000,000."

Section 6.4 of the Original Agreement is hereby amended in its
entirety to read as follows:

"6.4 Sales of Assets.

(a) No Related Person will sell, transfer or otherwise
dispose of, in one or any series of transactions within any 12-month
period, assets, whether now owned or hereafter acquired (including,
without limitation, any discount or sale of Credit Accounts), the
higher of the aggregate book value or the sale price of which for the
Consolidated Group exceeds $2,000,000, or enter into any agreement to
do so; provided, however, the foregoing restriction shall not apply to
the sale of hydrocarbons or inventory in the ordinary course of
business or to sales of assets described in Exhibit 6.4.

(b) If any Related Person engages in an Asset Sale or
incurs an Event of Loss, Borrower or such Related Person may either,
no later than 360 days after such Asset Sale or such Event of Loss,
(i) apply all or any of the Net Available Proceeds therefrom to prepay
the Obligations, provided that concurrently with such prepayment, the
Revolving Credit Commitment shall be permanently reduced by the amount
of such prepayment, or (ii) invest all or any part of the Net
Available Proceeds thereof in Property that replaces the Property that
was the subject of such Asset Sale or such Event of Loss, as the case
may be, or in other Property that will be used in the business of the
Related Persons. Nothing in this Section 6.4(b) shall be deemed to
permit any sale, transfer or other disposal of assets not permitted by
Section 6.4(a)."

Section 6.11 of the Original Agreement is hereby amended in its
entirety to read as follows:

"6.11 Investments. No Related Person will make, agree to
make or suffer to exist any Investment other than (A) that reflected
in the Financial Statements referred to in Section 4.4 above, (B)
overnight investments or other investment vehicles limited to the
following: (i) any evidence of Indebtedness with a maturity of 180
days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of
America is pledged in support thereof), (ii) demand and time deposits
and certificates of deposit or acceptances with a maturity of 180 days
or less of any financial institution that is a member of the

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<PAGE> 12
Federal Reserve System having combined capital and surplus and
undivided profits of not less than $500 million; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation that
is not an Affiliate of Borrower and is organized under the laws of any
state of the United States or the District of Columbia and rated at
least A-1 by Standard and Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc. or at least P-1 by Moody's Investors
Services, Inc.; (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in
clause (i) above entered into with any commercial bank meeting the
specifications of clause (ii) above; (v) overnight bank deposits and
bankers' acceptances at any commercial bank meeting the qualifications
specified in clause (ii) above; (vi) deposits available for withdrawal
on demand with any commercial bank not meeting the qualifications
specified in clause (ii) above, provided all such deposits do not
exceed $5 million in the aggregate at any one time; (vii) demand and
time deposits and certificates of deposit with any commercial bank
organized in the United States not meeting the qualifications
specified in clause (ii) above, provided that such deposits and
certificates support bond, letter of credit and other similar types of
obligations incurred in the ordinary course of business; and (viii)
investments in money market or other mutual funds substantially all of
whose assets comprise securities of the types described in clauses (i)
through (v) above."

Section 6.15 of the Original Agreement is hereby amended in its
entirety to read as follows:

"6.15. Consolidated Adjusted Equity. Related Persons will
not permit at any time their Consolidated Adjusted Equity to be less
than $100,000,000."

The following Section 6.18 is hereby added to the Original Agreement
immediately following Section 6.17 thereof:

"6.18. Cash Flow Coverage. The Related Persons' Cash Flow
Ratio for any fiscal quarter shall not be less than: (i) 1.0 to 1.0
as of the end of the third fiscal quarter of 1996, (ii) 1.25 to 1.0 as
of the end of the fourth fiscal quarter of 1996, and (iii) 1.5 to 1.0
as of the end of each fiscal quarter thereafter. As used in this
section, the term `Related Persons' Cash Flow Ratio' means the
quotient of (i) the sum of the Consolidated net income of the Related
Persons for such period plus amounts deducted in the computation of
such Consolidated net income for depreciation, depletion, amortization
and other non-cash items, plus cash interest expenses, divided by (ii)
the sum of all interest and principal payments due on the Obligations
and the Senior Unsecured Notes for such period."

Section 2.5. Events of Default. Section 7.1.16 of the Original
Agreement is hereby amended in its entirety to read as follows:

"7.1.16. the occurrence of a Change of Control".

-12-
<PAGE> 13
The following Section 7.1.17 is hereby added to the Original Agreement
immediately following Section 7.1.16:

"7.1.17. Borrower fails to pay any interest or principal
installment, when due, of the Senior Unsecured Notes, or any Related
Person breaches or defaults in the performance of the Indenture or any
other agreement or instrument by which the Senior Unsecured Notes are
governed or guaranteed, and any such failure, breach or default
continues beyond any applicable period of grace provided therefor."

Section 2.6. Exhibits. Exhibit 1.1 to the Original Agreement is
hereby amended in its entirety to read as set forth on Exhibit 1.1 hereto.
Exhibit 1.8 to the Original Agreement is hereby amended in its entirety to read
as set forth on Exhibit 1.8 hereto.

Section 2.7 Waiver and Consent. Lender hereby consents to the
sale of Cliffs Drilling No. 11 upon the exercise by Hercules Offshore
Corporation of its option to purchase under that certain Bareboat Charter
Agreement between Borrower and Hercules Offshore Corporation and waives any
violation of Section 6.4(a) of the Credit Agreement caused thereby. Lender
hereby further consents to Borrower accepting a promissory note in payment of
the purchase price of the Cliffs Drilling No. 11, which note shall be made by
Hercules Offshore Corporation payable to the order of Borrower with a final
maturity date not later than October 31, 1996 and secured by a lien on the
Cliffs Drilling No. 11. Lender waives any violation of Sections 6.10 and 6.11
of the Credit Agreement caused by Borrower's acceptance and ownership of the
Note.

ARTICLE III.

Conditions of Effectiveness

Section 3.1. Effective Date. This Amendment shall become effective
as of the date first above written when and only when (i) Lender shall have
received, at Lender's office, a counterpart of this Amendment executed and
delivered by Borrower, (ii) Borrower shall have issued and delivered to Lender
a promissory note with appropriate insertions in the form attached hereto as
Exhibit 1.8 payable to the order of Lender on or before May 31, 1998 (such note
being herein called the "Renewal Note"), duly executed on behalf of Borrower,
and dated the date hereof, (iii) Lender shall have received each of the other
Amendment Documents executed and delivered by Borrower, (iv) Borrower shall
have paid Lender a modification fee in accordance with the terms of the letter
agreement dated of even date herewith between Borrower and Lender, and (v)
Lender shall have additionally received all of the following documents, each
document (unless otherwise indicated) being dated the date of receipt thereof
by Lender, duly authorized, executed and delivered, and in form and substance
satisfactory to Lender:

(a) Opinion of Counsel for Borrower. Written opinions of
(i) Messrs. Griggs & Harrison, counsel for Borrower, COG, CDI, SOC,
and DRL dated as of

-13-
<PAGE> 14
the date of this Amendment, addressed to Lender, to the effect that
this Amendment and the other Amendment Documents have been duly
authorized, executed and delivered by Borrower, COG, CDI, SOC and DRL,
that the Credit Agreement and the other Amendment Documents constitute
the legal, valid and binding obligations of Borrower, COG, CDI, SOC
and DRL enforceable in accordance with their terms (subject, as to
enforcement of remedies, to applicable bankruptcy, reorganization,
insolvency and similar laws and to general principles of equity), and
to such other matters as requested by Lender, and (ii) Hill, Betts &
Nash, special counsel for Borrower and SOC, dated as of the date of
this Amendment, addressed to Lender, addressing the Preferred Fleet
Mortgage executed by SOC dated of even date herewith and executed for
the benefit of Lender.

(b) Supporting Documents. Lender shall have received (i)
a certificate of the Secretary of each of Borrower, COG, CDI, SOC, and
DRL dated the date of this Amendment certifying that attached thereto
is a true and complete copy of resolutions adopted by the Board of
Directors of such Person authorizing the execution, delivery and
performance of this Amendment, the Renewal Note and each other
Amendment Document and certifying the names and true signatures of the
officers of Borrower, COG, CDI, SOC, and DRL authorized to sign this
Amendment and the other Amendment Documents and (ii) such supporting
documents as Lender may reasonably request.

(c) Pilko & Associates. A favorable report of Pilko &
Associates regarding their environmental assessment of the
Southwestern Rigs, in scope and results acceptable to Lender.

Section 3.2. Insurance Review. Borrower agrees to deliver to
Lender by July 31, 1996, a favorable report of Soriero & Company Inc. regarding
their assessment of the insurance maintained by the Related Persons, in scope
and results acceptable to Lender.

ARTICLE IV.

Representations and Warranties

Section 4.1. Representations and Warranties of Borrower. In order
to induce Lender to enter into this Amendment, Borrower represents and warrants
to Lender that:

(a) The representations and warranties contained in
subsections 4.1, 4.2, 4.4, 4.6 and 4.27 of Article 4 of the Original
Agreement are true and correct at and as of the time of the
effectiveness hereof.

(b) Borrower, COG, CDI, SOC, and DRL are each duly
authorized to execute and deliver this Amendment and the other
Amendment Documents, and Borrower is and will continue to be duly
authorized to borrow and to perform its obligations under the Credit
Agreement. Borrower, COG, CDI, SOC, and DRL

-14-
<PAGE> 15
have each duly taken all corporate action necessary to authorize the
execution and delivery of this Amendment and the other Amendment
Documents and to authorize the performance of the obligations of
Borrower, COG, CDI, SOC, and DRL hereunder and thereunder.

(c) The execution and delivery by Borrower, COG, CDI,
SOC, and DRL of this Amendment and the other Amendment Documents (to
which each is a party), the performance by Borrower, COG, CDI, SOC,
and DRL of their respective obligations hereunder and thereunder, and
the consummation of the transactions contemplated hereby and thereby
do not and will not conflict with any provision of law, statute, rule
or regulation or of the articles of incorporation and bylaws of
Borrower, COG, CDI, SOC, or DRL or of any material agreement,
judgment, license, order or permit applicable to or binding upon
Borrower, COG, CDI, SOC, or DRL or result in the creation of any lien,
charge or encumbrance (other than those in favor of Lender) upon any
assets or properties of Borrower, COG, CDI, SOC, or DRL. Except for
those which have been duly obtained, no consent, approval,
authorization or order of any court or governmental authority or third
party is required in connection with the execution and delivery by
Borrower, COG, CDI, SOC, and DRL of this Amendment and the other
Amendment Documents or to consummate the transactions contemplated
hereby and thereby.

(d) When duly executed and delivered, each of this
Amendment, the Credit Agreement and the other Amendment Documents will
be a legal and binding instrument and agreement of Borrower, COG, CDI,
SOC, and DRL enforceable in accordance with its terms, except as
limited by bankruptcy, insolvency and similar laws applying to
creditors' rights generally and by principles of equity applying to
creditors' rights generally.

ARTICLE V.

Miscellaneous

Section 5.1. Ratification of Agreements. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. Any reference
to the Credit Agreement in any Loan Document shall be deeded to be a reference
to the Original Agreement as hereby amended. Any reference to the Revolving
Credit Note in any Loan Document shall be deemed to be a reference to the
Renewal Note. The execution, delivery and effectiveness of this Amendment and
the other Amendment Documents shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of Lender under the Credit
Agreement or any other Loan Document nor constitute a waiver of any provision
of the Credit Agreement or any other Loan Document.

Section 5.2. Survival of Agreements. All representations,
warranties, covenants and agreements of Borrower herein shall survive the
execution and delivery of this

-15-
<PAGE> 16
Amendment and the performance hereof, including without limitation the making
or granting of the Loans, and shall further survive until all of the
Obligations are paid in full. All statements and agreements contained in any
certificate or instrument delivered by any Related Person hereunder or under
the Credit Agreement to Lender shall be deemed to constitute representations
and warranties by, or agreements and covenants of, such Related Person under
this Amendment and under the Credit Agreement.

Section 5.3. Loan Documents. This Amendment and each other
Amendment Document is a Loan Document, and all provisions in the Credit
Agreement pertaining to Loan Documents apply hereto and thereto.

Section 5.4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA IN ALL RESPECTS, INCLUDING
CONSTRUCTION, VALIDITY AND PERFORMANCE.

Section 5.5. Counterparts. This Amendment may be separately
executed in counterparts and by the different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Amendment.

Section 5.6. AMENDMENT SUPERSEDING. THIS AMENDMENT CONSTITUTES THE
ENTIRE AGREEMENT OF THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN
OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE IN THIS REGARD, THIS
AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

Section 5.7. Acknowledgment. Each of SOC and DRL hereby agrees and
acknowledges that it is a party to the Credit Agreement and that it is bound by
the terms and provisions of the Credit Agreement to the same extent as if it
had been an original signatory to the Credit Agreement. Without limiting the
generality of the foregoing, SOC and DRL hereby agree and acknowledge that they
each expressly make all representations, warranties, covenants and
indemnifications made by the Related Persons in the Credit Agreement.

-16-
<PAGE> 17
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.

CLIFFS DRILLING COMPANY

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President - Finance

CLIFFS OIL AND GAS COMPANY

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President - Finance

CLIFFS DRILLING INTERNATIONAL, INC.

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President - Finance

SOUTHWESTERN OFFSHORE CORPORATION

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President
<PAGE> 18
DRL, INC.

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President

INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION

By: /s/ ROLAND BOEKHOUT
-----------------------------------
Roland Boekhout
Associate
<PAGE> 19
CONSENT AND AGREEMENT

Each of Southwestern Offshore Corporation and DRL, Inc. hereby
consents to the provisions of this Amendment and the transactions contemplated
herein, and hereby ratifies and confirms the Guaranty dated as of June 27, 1996
made by it for the benefit of Lender, and agrees that its obligations and
covenants thereunder are unimpaired hereby and shall remain in full force and
effect.

SOUTHWESTERN OFFSHORE CORPORATION

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President

DRL, INC.

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President
<PAGE> 20
CONSENT AND AGREEMENT

Each of Cliffs Oil and Gas Company and Cliffs Drilling International,
Inc., hereby consents to the provisions of this Amendment and the transactions
contemplated herein, and hereby ratifies and confirms the Second Restated
Guaranty dated as of June 27, 1996 made by it for the benefit of Lender, and
agrees that its obligations and covenants thereunder are unimpaired hereby and
shall remain in full force and effect.

CLIFFS OIL AND GAS COMPANY

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President - Finance

CLIFFS DRILLING INTERNATIONAL, INC.

By: /s/ EDWARD A. GUTHRIE
-----------------------------------
Edward A. Guthrie
Vice President - Finance
<PAGE> 21
EXHIBIT 1.1

FORM OF
BORROWING BASE CERTIFICATE

This Borrowing Base Certificate is being delivered pursuant to Section
5.2 of that one certain Second Restated Credit Agreement (as may be amended,
restated, modified and supplemented and in effect from time to time, the
"Credit Agreement") dated as of March 28, 1994, by and among Cliffs Drilling
Company ("Borrower"), Cliffs Oil and Gas Company ("COG"), Cliffs Drilling
International Inc. ("CDI"), Southwestern Offshore Corporation ("SOC"), and DRL
Inc. ("DRL"), each a Delaware corporation, and Internationale Nederlanden
(U.S.) Capital Corporation ("Lender"). All capitalized terms used but not
defined herein shall have the meaning ascribed to such term in the Credit
Agreement.

Borrower, COG, CDI, SOC and DRL hereby represent, warrant, and
acknowledge to Lender that:

(a) all representations and warranties made by any
Related Person in any Loan Document delivered on or before the date
hereof are true on and as of the date hereof (except to the extent
that the facts upon which such representations are based have been
changed by the transactions contemplated in the Credit Agreement) as
if such representations and warranties had been made as of the date
hereof;

(b) attached hereto is a schedule of calculations showing
Borrower's compliance as of ______________ ________ (the "Reporting
Date") with the requirements of Sections 6.14 and 6.16 of the
Agreement [and Borrower's non-compliance as of such date with the
requirements of Section(s) ______________ of the Agreement];

(c) on the Reporting Date Borrower was, and on the date
hereof Borrower is, in full compliance with the disclosure
requirements of Section 5.7 of the Agreement, and no Default otherwise
existed on the Reporting Date or otherwise exists on the date of this
instrument [except for Default(s) under Section(s) _______________ of
the Agreement, which [is/are] more fully described on a schedule
attached hereto].

The officer of Borrower signing this instrument hereby certifies that
he has reviewed the Loan Documents and has otherwise undertaken such inquiry as
is in his opinion necessary to enable him to express an informed opinion with
respect to the above representations, warranties and acknowledgments of
Borrower and, to the best of his knowledge, such representations, warranties,
and acknowledgments are true, correct and complete.

The undersigned, each an officer of Borrower, COG, CDI, SOC and DRL
hereby certify to Lender that the following is a true and accurate calculation
of the Borrowing

<PAGE> 22

Base as of the Reporting Date, as determined in accordance with the
requirements of the Credit Agreement:

(i) Eligible Accounts: $__________________________

(ii) 80% of Eligible Accounts: $__________________________

(iii) Oil and Gas Reserves: $__________________________

(iv) Eligible Turnkey Drilling Contract Amounts $__________________________

(v) 80% Eligible Turnkey Drilling
Contract Amounts $__________________________

(vi) Fleet Value $__________________________

(vii) 50% of Fleet Value $__________________________

(viii) West Indies Equity $__________________________

(ix) 50% of West Indies Equity $__________________________

(x) Guaranty Liabilities $__________________________

(xi) Borrower' determination of Borrowing
Base (sum of lines (ii), (iii), (v),
(vii) and (ix) minus (x))
(not to exceed $35,000,000): $__________________________

(xii) Loan Balance: $__________________________

(xiii) Letter of Credit Exposure
(not to exceed $10,000,000): $__________________________

(xiv) Hydrocarbon Exposure
(not to exceed $1,000,000) $__________________________

(xv) Total Exposure
(sum of lines (xii), (xiii) and (xiv)) $__________________________

(xvi) Available Commitment
(line (xi) minus line (xv)): $__________________________
<PAGE> 23
IN WITNESS WHEREOF, the undersigned have caused this Certificate to be
duly executed as of the _________ day of ____________, 199__.

CLIFFS OIL AND GAS COMPANY CLIFFS DRILLING COMPANY

By:___________________________ By:___________________________________
Name:______________________ Name:______________________________
Title:_____________________ Title:_____________________________

CLIFFS DRILLING INTERNATIONAL, INC.

By:___________________________________
Name:______________________________
Title:_____________________________

SOUTHWESTERN OFFSHORE DRL, INC.
CORPORATION

By:___________________________ By:__________________________________
Name:_____________________ Name:_____________________________
Title:____________________ Title:____________________________

<PAGE> 24
LENDER'S DETERMINATION OF BORROWING BASE

(a) Borrower's determination of
Borrowing Base: $________________

(b) Lender's Adjustment to Borrowing Base $________________

(d) Loan Balance: $________________

(e) Letter of Credit Exposure
(not to exceed $10,000,000): $________________

(f) Hydrocarbon Exposure
(not to exceed $1,000,000) $________________

(g) Total Exposure
(sum of lines (d), (e) and (f)): $________________

(h) Available Commitment
(line (c) minus line (g)): $________________
<PAGE> 25

REVOLVING CREDIT NOTE

$35,000,000 New York, New York June 27, 1996

FOR VALUE RECEIVED, the undersigned, CLIFFS DRILLING COMPANY, a
Delaware corporation (herein called "Borrower"), hereby promises to pay to the
order of INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION (herein called
"Lender"), the principal sum of Thirty-Five Million Dollars ($35,000,000) or,
if less, the aggregate unpaid principal amount of the Revolving Credit Loans
outstanding under this Note by Lender to Borrower pursuant to the terms of the
Credit Agreement (as hereinafter defined), together with interest on the unpaid
principal balance thereof as hereinafter set forth, both principal and interest
payable as herein provided in lawful money of the United States of America at
the New York Branch of Lender, 135 East 57th Street, New York, New York or at
such other place as from time to time may be designated by the holder of this
Note.

This Note (a) is issued and delivered under that certain Second
Restated Credit Agreement dated as of March 28, 1994 among Borrower, Cliffs Oil
and Gas Company, Cliffs Drilling International, Inc., and Lender, as amended by
the First Amendment to Second Restated Credit Agreement dated as of May 17,
1994, the Second Amendment to Second Restated Credit Agreement dated as of
September 26, 1995, the Third Amendment to Second Restated Credit Agreement
dated as of December 19, 1995, and the Fourth Amendment to Second Restated
Credit Agreement dated as of June 27, 1996, among Borrower, Cliffs Oil and Gas
Company, Cliffs Drilling International, Inc., Southwestern Offshore
Corporation, DRL, Inc. and Lender (herein, as so amended and as from time to
time further supplemented, amended or restated, called the "Credit Agreement"),
and is the Revolving Credit Note as defined therein, (b) is subject to the
terms and provisions of the Credit Agreement, which contains provisions for
payments and prepayments hereunder and acceleration of the maturity hereof upon
the happening of certain stated events, and (c) is secured by and entitled to
the benefits of certain Security Instruments (as identified and defined in the
Credit Agreement). Payments on this Note shall be made and applied as provided
herein and in the Credit Agreement. Reference is hereby made to the Credit
Agreement for a description of certain rights, limitations of rights,
obligations and duties of the parties hereto and for the meanings assigned to
terms used and not defined herein and to the Security Instruments for a
description of the nature and extent of the security thereby provided and the
rights of the parties thereto. This Note is given in renewal, extension and
restatement of (but not in extinguishment or novation of) that certain
promissory note dated December 19, 1995, made by Borrower payable to the order
of Lender in the stated principal amount of $20,000,000, which note was given
in renewal, extension and restatement of (but not in extinguishment or novation
of) that certain promissory note dated March 28, 1994, made by Borrower payable
to the order of Lender in the stated principal amount of $20,000,000, which
note was given in renewal, extension and restatement of (but not in
extinguishment or novation of) that certain promissory note dated December 23,
1993, made by Borrower payable to the order of Lender.
<PAGE> 26
For the purpose of this Note, the following terms have the meanings
assigned to them below:

"Base Rate Payment Date" means (i) the last day of each calendar
quarter, beginning June 30, 1996, and (ii) any day on which past due interest
or principal is owed hereunder and is unpaid. If the terms hereof or of the
Credit Agreement provide that payments of interest or principal hereon shall be
deferred from one Base Rate Payment Date to another day, such other day shall
also be a Base Rate Payment Date.

"Maximum Rate" means at the particular time in question the maximum
rate of interest which, under applicable law, may then be charged on this Note.
If such maximum rate of interest changes after the date hereof, the Maximum
Rate shall be automatically increased or decreased, as the case may be, without
notice to Borrower from time to time as of the effective time of each change in
such maximum rate.

The principal amount of this Note, together with all interest accrued
hereon, shall be due and payable in full on May 31, 1998.

The Base Rate Portion of the Revolving Credit Loans (exclusive of any
past due principal or interest) from time to time outstanding shall bear
interest on each day outstanding at the Base Rate in effect on such day. On
each Base Rate Payment Date Borrower shall pay to the holder hereof all unpaid
interest which has accrued on the Base Rate Portion to but not including such
Base Rate Payment Date. Each Fixed Rate Portion of the Revolving Credit Loan
(exclusive of any past due principal or interest) from time to time outstanding
shall bear interest on each day during the related Interest Period at the
related Fixed Rate in effect on such day. On each Fixed Rate Payment Date
relating to such Fixed Rate Portion Borrower shall pay to the holder hereof all
unpaid interest which has accrued on such Fixed Rate Portion to but not
including such Fixed Rate Payment Date. All past due principal of and past due
interest on the Revolving Credit Loan shall bear interest on each day
outstanding at the Default Rate in effect on such day, and such interest shall
be due and payable daily as it accrues. Notwithstanding the foregoing
provisions of this paragraph, if at any time the rate at which interest is
payable on this Note (considering together all portions of the Revolving Credit
Loan and the interest payable thereon) exceeds the Maximum Rate, this Note
shall bear interest at the Maximum Rate only but shall continue to bear
interest at the Maximum Rate until such time as the total amount of interest
accrued hereon equals (but does not exceed) the total amount of interest which
would have accrued hereon had there been no Maximum Rate applicable hereto.

Notwithstanding the foregoing paragraph and all other provisions of
this Note, in no event shall the interest payable hereon, whether before or
after maturity, exceed the maximum interest which, under applicable law, may be
charged on this Note, and this Note is expressly made subject to the provisions
of the Credit Agreement which more fully set out the limitations on how
interest accrues hereon.

If this Note is placed in the hands of an attorney for collection
after default, or if all or any part of the indebtedness represented hereby is
proved, established or collected

<PAGE> 27

in any court or in any bankruptcy, receivership, debtor relief, probate or
other court proceedings, Borrower and all endorsers, sureties and guarantors of
this Note jointly and severally agree to pay reasonable attorneys' fees and
collection costs to the holder hereof in addition to the principal and interest
payable hereunder.

Borrower and all endorsers, sureties and guarantors of this Note
hereby severally waive demand, presentment, notice of demand and of dishonor
and nonpayment of this Note, protest, notice of protest, notice of intention to
accelerate the maturity of this Note, declaration or notice of acceleration of
the maturity of this Note, diligence in collecting, the bringing of any suit
against any party and any notice of or defense on account of any extensions,
renewals, partial payments or changes in any manner of or in this Note or in
any of its terms, provisions and covenants, or any releases or substitutions of
any security, or any delay, indulgence or other act of any trustee or any
holder hereof, whether before or after maturity.

THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HERETO SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND
TO BE PERFORMED ENTIRELY WITHIN SUCH STATE EXCEPT TO THE EXTENT THE SAME ARE
GOVERNED BY APPLICABLE FEDERAL LAW.

CLIFFS DRILLING COMPANY

By:
--------------------------
Edward A. Guthrie
Vice President - Finance

<PAGE> 28
SCHEDULE 1

AMENDMENT DOCUMENTS

1. Amendment.

2. Renewal Note.

3. Second Restated Guaranty of COG.

4. Second Restated Guaranty of CDI.

5. Guaranty of SOC.

6. Guaranty of DRL.

7. Sixth Amendment to Deed of Trust, Security Agreement, Assignment of
Security Interests and Liens, Assignment of Production and Financing
Statement. (Webb & Zapata)

8. Fifth Amendment to Deed of Trust, Mortgage, Assignment, Security
Agreement and Financing Statement. (Calhoun County, et.al.)

9. Third Amendment to First Restated Security Agreement.

10. Security Agreement of SOC and DRL.

11. Fourth Amendment to Preferred Fleet Mortgage.

12. Third Amendment to Collateral Pledge Agreement.

13. Fifth Amendment to Louisiana Security Agreement, Assignment of
Production and Financing Statement.

14. Preferred Fleet Mortgage executed by SOC covering Southwestern 100,
Southwestern 150, Southwestern 151, Southwestern 152, Southwestern 153,
Southwestern 154, Southwestern 160, Southwestern 180 and Southwestern 200.

15. Amendments to Financing statements covering collateral described in
the First Restated Security Agreement.

16. Financing Statements executed by SOC and DRL covering collateral
described in the Security Agreement.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and the Consolidated Balance Sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 45,585
<SECURITIES> 0
<RECEIVABLES> 33,758
<ALLOWANCES> 797
<INVENTORY> 5,023
<CURRENT-ASSETS> 95,248
<PP&E> 286,331
<DEPRECIATION> 86,454
<TOTAL-ASSETS> 307,869
<CURRENT-LIABILITIES> 24,014
<BONDS> 150,000
<COMMON> 78
0
0
<OTHER-SE> 129,407
<TOTAL-LIABILITY-AND-EQUITY> 307,869
<SALES> 42,856
<TOTAL-REVENUES> 42,856
<CGS> 30,073
<TOTAL-COSTS> 36,064
<OTHER-EXPENSES> (3,540)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,586
<INCOME-PRETAX> 8,746
<INCOME-TAX> 3,061
<INCOME-CONTINUING> 5,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,685
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89

</TABLE>