<PAGE> 1
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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 SEPTEMBER 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 November 7, 1996:
7,453,804
(Exhibit Index Located on Page 20)
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CLIFFS DRILLING COMPANY
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 Nine Months Ended September 30, 1996 and 1995 ............ 3
Consolidated Balance Sheets -
CLIFFS DRILLING COMPANY
September 30, 1996 (Unaudited) and December 31, 1995 ............... 4
Consolidated Statements of Cash Flows (Unaudited) -
CLIFFS DRILLING COMPANY
Three and Nine Months Ended September 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 ............................ 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 18
SIGNATURES ................................................................ 19
EXHIBIT INDEX ............................................................. 20
</TABLE>
2
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CLIFFS DRILLING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands, except
per share amounts)
REVENUES:
Revenues ............................................................. $ 43,262 $ 20,252 $ 86,022 $ 48,987
Income (Loss) from Equity Investments ................................ 235 (216) 331 (716)
-------- -------- -------- --------
43,497 20,036 86,353 48,271
COSTS AND EXPENSES:
Operating Expenses ................................................... 28,805 16,335 58,878 38,089
Depreciation, Depletion and Amortization ............................. 3,578 1,473 6,755 4,929
General and Administrative Expense ................................... 1,529 1,311 4,343 3,928
-------- -------- -------- --------
33,912 19,119 69,976 46,946
-------- -------- -------- --------
OPERATING INCOME .......................................................... 9,585 917 16,377 1,325
OTHER INCOME (EXPENSE):
Gain (Loss) on Disposition of Assets ................................. (39) (6) 2,608 (47)
Interest Income ...................................................... 1,068 216 1,872 782
Interest Expense ..................................................... (3,878) (77) (5,464) (142)
Exchange Rate Gain (Loss) ............................................ (11) 1,083 137 1,385
Other, net ........................................................... (96) 61 (155) (662)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ................................................ 6,629 2,194 15,375 2,641
INCOME TAX EXPENSE ........................................................ 2,320 548 5,381 660
-------- -------- -------- --------
NET INCOME ................................................................ 4,309 1,646 9,994 1,981
DIVIDENDS APPLICABLE TO PREFERRED STOCK ................................... -- (665) (31) (1,995)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON AND
COMMON EQUIVALENT SHARES ............................................. $ 4,309 $ 981 $ 9,963 $ (14)
======== ======== ======== ========
NET INCOME PER SHARE:
Primary .............................................................. $ 0.57 $ 0.24 $ 1.47 $ --
======== ======== ======== ========
Assuming Full Dilution ............................................... $ 0.24 $ --
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary .............................................................. 7,539 4,114 6,761 4,102
======== ======== ======== ========
Assuming Full Dilution ............................................... 4,114 4,102
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 4
CLIFFS DRILLING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents ............................................... $ 43,101 $ 26,405
Accounts Receivable, net of allowance for doubtful accounts of $797 at
September 30, 1996 and December 31, 1995, respectively .............. 24,053 11,170
Notes and Other Receivables, Current .................................... 11,947 1,812
Inventories ............................................................. 5,420 4,114
Drilling Contracts in Progress .......................................... 15,215 11,339
Prepaid Insurance ....................................................... 7,368 957
Other Prepaid Expenses .................................................. 4,028 2,400
------------ ------------
Total Current Assets .............................................. 111,132 58,197
PROPERTY AND EQUIPMENT, AT COST:
Rigs and Related Equipment .............................................. 270,179 122,777
Oil and Gas Properties ("successful efforts" method) .................... 23,782 23,497
Other ................................................................... 3,755 3,201
------------ ------------
297,716 149,475
Less: Accumulated Depreciation, Depletion and Amortization ............. (89,860) (83,525)
------------ ------------
Net Property and Equipment ........................................ 207,856 65,950
NOTES AND OTHER RECEIVABLES, LONG-TERM ...................................... 3,750 4,441
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES .................... 3,787 269
DEFERRED CHARGES AND OTHER .................................................. 5,013 105
------------ ------------
TOTAL ASSETS ...................................................... $ 331,538 $ 128,962
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ........................................................ $ 26,905 $ 20,392
Accrued Interest ........................................................ 5,506 1
Other Accrued Expenses .................................................. 9,133 3,945
------------ ------------
Total Current Liabilities ......................................... 41,544 24,338
10.25% SENIOR NOTES ......................................................... 150,000 --
DEFERRED INCOME TAXES ....................................................... 5,540 1,447
DEFERRED INCOME AND OTHER ................................................... 380 412
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; 7,856,036 and
4,518,104 shares issued and 7,422,035 and 4,113,067 shares
outstanding at September 30, 1996 and December 31, 1995, respectively . 79 45
Paid-In Capital ......................................................... 149,735 99,186
Retained Earnings (Deficit) ............................................. (10,145) (20,108)
Less: Notes Receivable from Officers for Restricted Stock ............... (232) (232)
Restricted Stock .................................................. (18) (32)
Treasury Stock, at cost, 434,001 and 405,037 shares at
September 30, 1996 and December 31, 1995, respectively .......... (5,345) (4,844)
------------ ------------
Total Shareholders' Equity ........................................ 134,074 74,015
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 331,538 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income ................................................ $ 4,309 $ 1,646 $ 9,994 $ 1,981
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation, Depletion and Amortization ............... 3,578 1,473 6,755 4,929
Mobilization Expense Amortization ...................... 59 131 255 388
(Gain) Loss on Disposition of Assets ................... 39 6 (2,608) 47
Amortization of Debt Issue Costs ....................... 186 -- 266 --
Other .................................................. 77 (31) 320 84
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts Receivable and Notes and Other Receivables (3,039) (1,707) (17,918) (4,187)
Inventories ........................................ (397) 72 (1,306) 1,195
Drilling Contracts in Progress ..................... (7,998) (5,436) (3,873) (11,069)
Prepaid Insurance and Other Prepaid Expenses ....... (6,994) 667 (8,268) 1,672
Investments in and Advances to Unconsolidated
Affiliates ..................................... (235) 3,666 (331) 3,616
Accounts Payable and Other Accrued Expenses ........ 19,313 2,545 21,056 3,579
--------- --------- --------- ---------
Net Cash Provided By Operating Activities ... 8,898 3,032 4,342 2,235
INVESTING ACTIVITIES:
Capital Expenditures ...................................... (8,823) (2,529) (22,039) (10,647)
Acquisition of Rigs and Related Equipment ................. (3,072) -- (108,477) (1,750)
Acquisition of Equity Interest in Rig and Related Equipment -- -- (3,187) --
Proceeds from Sale of Property and Equipment .............. 270 14 1,267 217
Insurance Proceeds from Loss of Rig and Related Equipment . -- -- 292 --
Collection of Notes Receivable ............................ 243 144 691 1,381
--------- --------- --------- ---------
Net Cash Used In Investing Activities ....... (11,382) (2,371) (131,453) (10,799)
FINANCING ACTIVITIES:
Proceeds from Borrowings .................................. -- 1,000 150,000 3,000
Payments on Borrowings .................................... -- (3,000) -- (3,000)
Debt Issue Costs .......................................... -- -- (4,651) --
Acquisition of Treasury Stock ............................. -- -- (661) --
Payments for Redemption of Preferred Stock ................ -- -- (850) --
Preferred Stock Dividends ................................. -- (665) (31) (1,995)
--------- --------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities ............................ -- (2,665) 143,807 (1,995)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (2,484) (2,004) 16,696 (10,559)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............. 45,585 2,765 26,405 11,320
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 43,101 $ 761 $ 43,101 $ 761
========= ========= ========= =========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for Acquisition of Rigs and Related
Equipment ............................................... $ -- $ -- $ 22,215 $ --
========= ========= ========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 6
CLIFFS DRILLING COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine months ended September 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 per share computations are based on net income 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 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
6
<PAGE> 7
corporation and wholly-owned subsidiary of the Company ("Merger Sub"), acquired
one 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 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 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). On
September 30, 1996, the Company acquired an additional land rig for $2.9
million. The Company is currently refurbishing and upgrading the drilling rig
and expects to mobilize the unit to Venezuela during the first quarter of
1997. The remaining proceeds will be used for general corporate purposes,
including acquisition of additional 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 mobilized the Diamond Rig to Venezuela where it was refurbished and
upgraded prior to commencing operations in Lake Maracaibo, Venezuela for
Maraven S.A. under an initial eight-month contract.
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 September 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 December 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
<PAGE> 8
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 $1.1 million
during the first nine months of 1996. These losses were offset by exchange rate
gains during the period.
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 following unaudited pro forma financial information gives 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 financial information is based upon the historical unaudited
consolidated financial statements of the Company and Southwestern for the nine
months ended September 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 nine months ended September 30, 1995, 40% of the Southwestern Rigs
were not available for service as a result of being cold stacked or
refurbished.
The pro forma financial information for the nine months ended September 30,
1996 was prepared assuming that the transactions described above were
consummated as of January 1, 1995. The pro forma financial information has 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.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
1996 1995
-------- --------
(In thousands, except
per share amounts)
(Unaudited)
<S> <C> <C>
REVENUES .......................................... $100,916 $ 64,904
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS .......... 5,989 (9,212)
NET INCOME (LOSS) ................................. 5,989 (9,212)
NET INCOME (LOSS) PER SHARE ....................... $ 0.81 $ (2.11)
</TABLE>
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed in "Liquidity and Capital Resources"
and elsewhere in this Form 10-Q. All subsequent written and oral
forward-looking statements attributable to the Company, or persons acting on
its behalf, are expressly qualified in their entirety by the Cautionary
Statements.
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 September 30, 1996 and 1995
The Company recognized net income, before preferred dividends, of $4.3 million
during the third quarter of 1996 compared to net income of $1.6 million in the
third quarter of 1995. Revenues increased $23.5 million and operating income
increased $8.7 million in the third quarter of 1996 compared to the same period
in 1995. Improved operating results from the Company's daywork drilling and
engineering services business segments contributed to the increases in revenues
and operating income.
9
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
INCREASE
1996 1995 (DECREASE)
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling .............. $ 26,894 $ 4,806 $ 22,088
Engineering Services .......... 18,857 16,108 2,749
MOPU Operations ............... 956 1,318 (362)
Oil and Gas ................... 372 359 13
Eliminations .................. (3,582) (2,555) (1,027)
---------- ---------- ----------
Consolidated .............. $ 43,497 $ 20,036 $ 23,461
========== ========== ==========
Operating Income (Loss):
Daywork Drilling .............. $ 8,023 $ 588 $ 7,435
Engineering Services .......... 2,437 836 1,601
MOPU Operations ............... 603 811 (208)
Oil and Gas ................... 49 17 32
Corporate Office .............. (1,557) (1,335) (222)
Eliminations .................. 30 -- 30
---------- ---------- ----------
Consolidated .............. $ 9,585 $ 917 $ 8,668
========== ========== ==========
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $22.1 million and operating income
increased $7.4 million in the third quarter of 1996 compared to the third
quarter of 1995. Of the $7.4 million increase in operating income, $5.7 million
was generated from 10 of 11 jack-up drilling rigs acquired 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. In addition,
on May 10, 1996, the Company acquired the Diamond Rig and renamed it Cliffs
Drilling No. 155. See Note 4. Seven of the 11 jack-up drilling rigs are
currently operating in the Gulf of Mexico and one jack-up rig is operating in
each of Venezuela, Qatar and Trinidad. The other jack-up rig acquired in May,
1996 is scheduled to commence refurbishment during the fourth quarter of 1996
and is expected to begin operations in the second quarter of 1997.
The Company operates its drilling rigs on both a term and a spot basis.
Drilling rigs contracted on a term basis generally work in various
international locations, while drilling rigs contracted on a spot basis
generally work in the U.S. Gulf of Mexico. The following table summarizes
revenues, utilization and average dayrates for the Company's significant
classes of drilling rigs:
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
Increase
1996 1995 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Daywork Drilling Revenues (in thousands) (1):
Jack-up Rigs:
International ............................. $ 6,113 $ 1,409 $ 4,704
Domestic .................................. 14,103 -- 14,103
Land Rigs ................................... 5,017 3,369 1,648
Other ....................................... 1,661 28 1,633
-------- -------- --------
Total ................................. $ 26,894 $ 4,806 $ 22,088
======== ======== ========
Average Rig Utilization (2):
Jack-up Rigs:
International ............................. 100% 100%
Domestic .................................. 97% N/A
Land Rigs ................................... 100% 100%
Average Dayrates (3):
Jack-up Rigs:
International ............................. $ 24,467 $ 20,179
Domestic .................................. 22,054 N/A
Land Rigs ................................... 8,821 7,102
</TABLE>
- ---------
(1) Includes revenues earned from affiliates.
(2) Utilization rates are based upon the number of actively marketed rigs in
the fleet and exclude rigs which are cold-stacked and rigs which are
unavailable for operations during periods of refurbishment and upgrade.
(3) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
On September 30, 1996, the Company acquired an additional land rig for $2.9
million. The Company is currently refurbishing and upgrading the drilling rig
and expects to mobilize the unit to Venezuela during the first quarter of
1997.
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."
Engineering Services
Engineering services revenues increased $2.7 million and operating income
increased $1.6 million in the third quarter of 1996 compared to the third
quarter of 1995. Four turnkey contracts were completed during the third quarter
of both 1996 and 1995. Two of the 4 contracts completed during the third
quarter of 1996 were international contracts in Venezuela, which generally
generate greater revenues and operating income than domestic contracts.
Operating income of $2.4 million in the third quarter of 1996 included a $2.3
million accrual for an expected loss on a turnkey drilling contract in progress
at September 30, 1996. The Company completed this turnkey drilling contract in
November, 1996.
11
<PAGE> 12
As of September 30, 1996, the Company had 6 turnkey wells in progress,
including 2 wells in Venezuela and 4 wells in the United States. Five of the 6
turnkey wells in progress at September 30, 1996 are expected to complete during
the fourth quarter of 1996.
MOPU Operations
MOPU revenues decreased $.4 million and operating income decreased $.2 million
in the third quarter of 1996 compared to the third quarter of 1995. The
decreases in revenues and operating income were primarily due to 3 MOPUs which
were under operating or standby contracts in the third quarter of 1995 but were
idle during the third quarter of 1996, partially offset by revenues and
operating income associated with the LANGLEY, which was not under contract
during the third quarter of 1995.
The Company owns 5 MOPUs. Four of the units are currently under contract and the
Company has received a letter of intent on the other MOPU for international
operations which are expected to commence during the second quarter of 1997. The
3 MOPUs which have been recently contracted will require various refurbishments
and upgrades. See "Liquidity and Capital Resources."
Cliffs Drilling No. 11 was sold during June, 1996. See Note 6.
Oil and Gas
Oil and gas revenues and operating income in the third quarter of 1996 were
consistent with the third quarter of 1995.
Corporate Overhead
Corporate overhead increased $.2 million in the third quarter of 1996 compared
to the third 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 $5.3 million of other expense during the third quarter
of 1996 compared to $.7 million of other income during the same period in 1995.
The net increase in other expenses resulted primarily from increases in
interest expense associated with the 10.25% Senior Notes and income taxes,
offset in part by an increase in interest income. In addition, the Company
recognized income of $1.1 million in foreign currency exchange rate gains
related to Venezuela Brady Bond transactions during the third quarter of 1995
compared to none in the same period in 1996. See "Liquidity and Capital
Resources."
12
<PAGE> 13
Nine Months Ended September 30, 1996 and 1995
The Company recognized net income, before preferred dividends, of $10.0 million
in the first nine months of 1996 compared to net income of $2.0 million during
the same period in 1995. Revenues increased $38.1 million and operating income
increased $15.1 million in the first nine months of 1996 compared to the same
period in 1995. Improved operating results from the Company's daywork drilling
and engineering services business segments contributed to the increases in
revenues and operating income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
INCREASE
1996 1995 (DECREASE)
-------- -------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Daywork Drilling .............. $ 46,454 $ 19,783 $ 26,671
Engineering Services .......... 43,438 28,301 15,137
MOPU Operations ............... 3,277 3,793 (516)
Oil and Gas ................... 1,010 1,150 (140)
Eliminations .................. (7,826) (4,756) (3,070)
-------- -------- --------
Consolidated .............. $ 86,353 $ 48,271 $ 38,082
======== ======== ========
Operating Income (Loss):
Daywork Drilling .............. $ 12,102 $ 2,104 $ 9,998
Engineering Services .......... 6,560 1,576 4,984
MOPU Operations ............... 2,251 1,768 483
Oil and Gas ................... (111) (123) 12
Corporate Office .............. (4,425) (4,000) (425)
Eliminations .................. -- -- --
-------- -------- --------
Consolidated .............. $ 16,377 $ 1,325 $ 15,052
======== ======== ========
</TABLE>
Daywork Drilling
Daywork drilling revenues increased $26.7 million and operating income
increased $10.0 million in the first nine months of 1996 compared to the same
period in 1995. Of the $10.0 million increase in operating income, $7.7 million
was generated from 10 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 nine months of 1996 include
contributions from the acquired rigs from the date of acquisition, May 23,
1996, through September 30, 1996. These increases in revenues and operating
income were offset in part by the loss of the jack-up drilling rig MARQUETTE
during 1995.
See "Results of Operations -- Three Months Ended September 30, 1996 and 1995"
and "Liquidity and Capital Resources."
13
<PAGE> 14
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
Increase
1996 1995 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Daywork Drilling Revenues (in thousands) (1):
Jack-up Rigs:
International .......................... $ 10,026 $ 10,315 $ (289)
Domestic ............................... 18,687 -- 18,687
Land Rigs ................................ 14,426 9,440 4,986
Other .................................... 3,315 28 3,287
-------- -------- --------
Total .............................. $ 46,454 $ 19,783 $ 26,671
======== ======== ========
Average Rig Utilization (2):
Jack-up Rigs:
International .......................... 100% 100%
Domestic ............................... 97% N/A
Land Rigs ................................ 100% 100%
Average Dayrates (3):
Jack-up Rigs:
International .......................... $ 23,549 $ 20,094
Domestic ............................... 21,560 N/A
Land Rigs ................................ 8,616 6,844
</TABLE>
- ---------
(1) Includes revenues earned from affiliates.
(2) Utilization rates are based upon the number of actively marketed rigs in
the fleet and exclude rigs which are cold-stacked and rigs which are
unavailable for operations during periods of refurbishment and upgrade.
(3) Daywork drilling revenues less non-recurring revenues divided by aggregate
contract days, adjusted to exclude days under contract at zero dayrate.
Engineering Services
Engineering services revenues increased $15.1 million and operating income
increased $5.0 million in the first nine months of 1996 compared to the same
period in 1995. Eight turnkey contracts were completed during the first nine
months of 1996 compared to seven turnkey contract completions in the same
period in 1995. Four of the 8 contracts completed during the first nine months
of 1996 were international contracts in Venezuela, which generally generate
greater revenues and operating income than domestic contracts. Operating income
for the first nine months of 1996 was reduced by an accrual of $2.3 million for
an expected loss on one turnkey drilling contract in progress at September 30,
1996.
See "Results of Operations -- Three Months Ended September 30, 1996 and 1995."
MOPU Operations
MOPU operating income increased $.5 million in the first nine months of 1996
compared to the same period in 1995 despite a $.5 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
nine months of 1995, offset in part by reduced operating results from 3 idle
MOPUs which were under operating or standby contracts in the first nine months
of 1995.
See "Results of Operations -- Three Months Ended September 30, 1996 and 1995."
14
<PAGE> 15
Oil and Gas
Oil and gas revenues decreased $.1 million in the first nine months of 1996
compared to the first nine months of 1995, primarily due to decreased gas
production, offset in part by increased gas prices during the first nine months
of 1996 compared to the same period in 1995. Operating losses were consistent
during the same periods, primarily due to a decrease in depreciation, depletion
and amortization, partially offset by the revenue decrease and increased
operating expenses associated with workovers completed during 1996.
Corporate Overhead
Corporate overhead increased $.4 million in the first nine months of 1996
compared to the same period in 1995. The increase was primarily due to
increased costs associated with the Southwestern operations.
Other Income (Expense) and Income Taxes
The Company recognized $6.4 million of other expense during the first nine
months of 1996 compared to $.7 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 and income taxes, offset in
part by the gain on disposition of the Cliffs Drilling No. 11 and an increase
in interest income. In addition, the Company recognized a net $1.4 million
foreign currency exchange rate gain primarily related to Venezuela Brady Bond
transactions during the first nine months of 1995 compared to $.1 million in
the same period in 1996. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $16.7 million from $26.4
million at December 31, 1995 to $43.1 million at September 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 $131.4
million and net cash provided by operating activities of $4.3 million.
Operating Activities
Net cash of $4.3 million provided by operating activities included $10.6
million used for working capital and other requirements. "Accounts Receivable"
increased from December 31, 1995 to September 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 an underground blowout on a domestic
turnkey well and the receipt of a note related to the sale of one of the
Company's MOPUs, Cliffs Drilling No. 11.
Investing Activities
Net cash of $131.4 million used to fund investing activities included $130.5
million of capital expenditures, primarily for the jack-up drilling rig
acquisitions completed during May, 1996 and related rig refurbishments. See
Note 4. In addition, cash was used for upgrade and renovation activities on
several other drilling rigs and MOPUs. The Company has plans for other capital
expenditures totaling approximately $17 million during 1996. The Company
intends to fund these capital expenditure requirements with available cash,
internally-generated cash flow and amounts currently available under its
Revolving Credit Facility.
15
<PAGE> 16
"Investments in and Advances to Unconsolidated Affiliates" increased from
December 31, 1995 to September 30, 1996 due to $3.2 million paid for the
acquisition of an equity interest in a joint venture that owns one jack-up
drilling rig in May, 1996.
Cliffs Drilling No. 11 was sold during June, 1996. See Note 6.
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. See Notes 3 and 4.
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 September 30, 1996, the Company had no indebtedness
outstanding under the Revolving Credit Facility.
Exchange Rate Gains and Losses
Approximately 50% of the Company's revenues and a substantial portion of its
operating income were sourced from its Venezuelan operations during the first
nine 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 losses of $1.1 million incurred during the first
nine months of 1996 offset exchange gains realized 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.
16
<PAGE> 17
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.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE> 19
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: November 8, 1996 By: /s/ Edward A. Guthrie
------------------------------------
Edward A. Guthrie
Vice President - Finance
Date: November 8, 1996 By: /s/ Cindy B. Taylor
------------------------------------
Cindy B. Taylor
Vice President - Controller
19
<PAGE> 20
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 43,101
<SECURITIES> 0
<RECEIVABLES> 36,797
<ALLOWANCES> 797
<INVENTORY> 5,420
<CURRENT-ASSETS> 111,132
<PP&E> 297,716
<DEPRECIATION> 89,860
<TOTAL-ASSETS> 331,538
<CURRENT-LIABILITIES> 41,544
<BONDS> 150,000
0
0
<COMMON> 79
<OTHER-SE> 133,995
<TOTAL-LIABILITY-AND-EQUITY> 331,538
<SALES> 86,353
<TOTAL-REVENUES> 86,353
<CGS> 58,878
<TOTAL-COSTS> 69,976
<OTHER-EXPENSES> (4,462)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,464
<INCOME-PRETAX> 15,375
<INCOME-TAX> 5,381
<INCOME-CONTINUING> 9,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,994
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
</TABLE>
