<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
________________________
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER: 0-18309
________________________
MARINE DRILLING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2558926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14141 SOUTHWEST FREEWAY, SUITE 2500, SUGAR LAND, TEXAS 77478-3435
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 491-2002
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 ___. ___.
The number of shares of Common Stock, $.01 par value, outstanding at
September 30, 1994 was 43,870,131.
<PAGE> 2
MARINE DRILLING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements
Consolidated Balance Sheets --
September 30, 1994 and December 31, 1993 . . . . . . . . . . . 1
Consolidated Statements of Operations --
Three and Nine Months Ended September 30, 1994 and 1993 . . . 2
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1994 and 1993 . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
(i)
<PAGE> 3
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,277 $ 21,969
Short-term investments 17,394 --
Accounts receivable - trade and other, net 14,085 19,356
Other current assets 1,091 854
------------ ------------
Total current assets 46,847 42,179
Property and Equipment 89,121 87,140
Less accumulated depreciation 11,003 5,295
------------ ------------
Property and equipment, net 78,118 81,845
Other assets 685 147
------------ ------------
$ 125,650 $ 124,171
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,756 $ 8,647
Employer's liability claims, current 1,312 1,443
------------ ------------
Total current liabilities 5,068 10,090
Employer's Liability Claims, non-current 2,203 2,288
Deferred Income Taxes 7,572 5,376
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000
shares; issued and outstanding 43,870,131 and
43,682,668 shares as of September 30, 1994 and
December 31, 1993, respectively 439 437
Common stock restricted (953) (844)
Additional paid-in capital 91,979 91,801
Retained earnings from January 1, 1993 19,342 15,023
Accumulated deficit of $49,572 as of December 31, 1992
eliminated in quasi-reorganization -- --
------------ ------------
Total shareholders' equity 110,807 106,417
------------ ------------
$ 125,650 $ 124,171
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 17,393 $ 20,906 $ 52,438 $ 58,681
Costs and Expenses:
Contract drilling 13,112 10,854 38,052 32,945
Depreciation and amortization 1,953 1,310 5,727 3,927
General and administrative 962 2,910 2,817 6,920
------------ ------------- ------------ ------------
16,027 15,074 46,596 43,792
------------ ------------- ------------ ------------
Operating income 1,366 5,832 5,842 14,889
------------ ------------- ------------ ------------
Other Income (Expense):
Interest expense -- (83) -- (580)
Interest income 427 219 781 296
Other income (expense) (60) 103 21 138
------------ ------------- ------------ ------------
367 239 802 (146)
------------ ------------- ------------ ------------
Income before income taxes 1,733 6,071 6,644 14,743
Income taxes 606 2,223 2,325 5,172
------------ ------------- ------------ ------------
Net income $ 1,127 $ 3,848 $ 4,319 $ 9,571
============ ============= ============ ============
Income per common share $ 0.03 $ 0.09 $ 0.10 $ 0.24
============ ============= ============ ============
Weighted average common shares
outstanding 43,829,717 43,416,551 43,797,028 40,044,935
============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1994 1993
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,319 $ 9,571
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,727 3,927
Deferred income taxes 2,196 2,452
Pre-quasi-reorganization net operating loss
carryforwards -- 1,393
Gain on disposition of equipment (476) (451)
Accrual of compensation expense, net 306 171
Changes in operating assets and liabilities:
Receivables 5,271 (2,251)
Other current assets (237) (52)
Payables, accrued expenses and employer's
liability claims (4,726) 5,218
Other (1,154) --
------------ ------------
Total adjustments 6,907 10,407
------------ ------------
Net cash provided by operating activities 11,226 19,978
------------ ------------
Cash Flows From Investing Activities:
Purchase of short-term investments, net (17,394) --
Purchase of equipment (2,076) (4,632)
Proceeds from disposition of equipment 552 546
------------ ------------
Net cash used in investing activities (18,918) (4,086)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from sale of common stock -- 28,200
Issuance cost of sale of common stock -- (422)
Payments of debt -- (21,280)
Proceeds from exercise of stock options -- 5
------------ ------------
Net cash provided by financing activities -- 6,503
------------ ------------
Net increase (decrease) in cash and cash
equivalents (7,692) 22,395
Cash and cash equivalents at beginning of period 21,969 9,173
------------ ------------
Cash and cash equivalents at end of period $ 14,277 $ 31,568
============ ============
</TABLE>
[Continued]
See notes to consolidated financial statements.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1994 1993
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ -- $ 580
Income taxes paid $ 416 $ 293
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of 83,000 shares of restricted common
stock $ 415 $ --
Issuance of 285,000 shares of restricted common
stock $ -- $ 465
Issuance of 115,713 shares to employee retirement
plan $ 605 $ --
Restricted stock forfeitures of 11,250 shares $ 37 $ --
Receivable related to sale of 5,000,000 shares of
common stock $ -- $ 28,200
Accrued expenses associated with sale of common
stock $ -- $ 400
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
(1) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of the Company presented
herein have been prepared without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information
and notes required by generally accepted accounting principles for complete
financial statements have been condensed or omitted. In the opinion of
management, these statements include all adjustments (all of which consist of
normal recurring adjustments except as otherwise noted herein) necessary to
present fairly the Company's financial position and results of operations for
the interim periods presented. These statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993. The
results of operations for the nine months ended September 30, 1994 are not
necessarily indicative of the results of operations that may be expected for
the year.
(2) RECLASSIFICATION OF ACCOUNTS
Certain reclassifications have been made to the 1993 consolidated
financial statements to conform with the 1994 presentation.
(3) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
U.S. federal . . . . . . . . . . . . . . $ 47 $ 116 $ 128 $ 281
State . . . . . . . . . . . . . . . . . -- 12 1 12
Foreign . . . . . . . . . . . . . . . . -- 254 -- 1,034
---------- ---------- ----------- ------------
47 382 129 1,327
---------- ---------- ----------- ------------
Other:
U.S. federal -- deferred 559 1,022 2,196 2,452
Pre-quasi-reorganization net
operating loss carryforwards . . . . -- 819 -- 1,393
---------- ---------- ----------- ------------
559 1,841 2,196 3,845
---------- ---------- ----------- ------------
Total tax provision . . . . . . . . . . . $ 606 $ 2,223 $ 2,325 $ 5,172
========== ========== =========== ============
</TABLE>
For the nine months ended September 30, 1994, the effective tax rate
for financial reporting purposes approximates the U.S. federal statutory rate
of 35%.
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1994 and December 31, 1993 are presented
below.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . $ 29,519 $ 33,312
Investment tax, general business and foreign tax
credit carryforwards . . . . . . . . . . . . . . . . . . . . 15,463 15,463
Employer's liability claims . . . . . . . . . . . . . . . . . . 1,230 1,306
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . 22 166
------------ -------------
Total gross deferred tax assets . . . . . . . . . . . . . . . . 46,234 50,247
Less valuation allowance . . . . . . . . . . . . . . . . . . . . (40,741) (42,209)
------------ -------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . 5,493 8,038
------------ -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation . . . . . . . . . . . . . . . . . . . . . . . 11,269 11,393
Deferred intercompany gains and losses . . . . . . . . . . . . . 1,796 2,021
------------ -------------
Total gross deferred tax liabilities . . . . . . . . . . . . . . 13,065 13,414
------------ -------------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 7,572 $ 5,376
============ =============
</TABLE>
(4) SHORT-TERM INVESTMENTS
Short-term investments are carried at amortized cost, which
approximates market as of September 30, 1994. They consist of U.S. government
or agency issues, certificates of deposit and corporate paper, and are
generally held to maturity.
(5) NET INCOME PER COMMON SHARE
Net income per common share for the nine months ended September 30,
1994 excludes the effect of outstanding stock options inasmuch as the potential
dilution from their exercise is less than three percent.
(6) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain claims and litigation arising out
of operations in the normal course of business. In the opinion of management,
uninsured losses, if any, will not be material to the Company's financial
position or results of operations.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company, through its predecessors, has been engaged since 1966 in
offshore contract drilling of oil and gas wells for independent and major oil
and gas companies. The Company currently operates in the U.S. Gulf of Mexico
and the Bay of Campeche offshore Mexico. As of the date of this report, the
Company operated a fleet of twelve mobile offshore jack-up drilling rigs
consisting of four independent leg cantilever jack-ups and eight mat supported
jack-ups. During October 1994, the Company entered into an agreement to
purchase the MARINE 3, a 262 foot water depth mat slot jack-up. The Company
has chartered that rig since February 1993 and the charter was scheduled to
terminate in February 1995. As of the date of this report, eleven of the
Company's twelve rigs were located in the U.S. Gulf of Mexico and one was in
the Bay of Campeche.
The Company was incorporated in Texas in January 1990 and was
significantly restructured and recapitalized in 1992 and early 1993 (the
"Recapitalization"). The principal executive offices of the Company are
located at 14141 Southwest Freeway, Suite 2500, Sugar Land, Texas 77478-3435
and the telephone number of such offices is (713) 491-2002. References to the
''Company'' herein include Marine Drilling Companies, Inc. and its subsidiaries
unless the context otherwise requires.
The Company's strategy is to strive to maintain its position as a
significant provider of offshore drilling services in its present markets and
to diversify, insofar as financially and operationally practicable, into other
international markets. The Company has commenced a program to upgrade the
operational capabilities of eight of its rigs. The Company also intends to
actively pursue the acquisition of additional rigs and to seek business
combinations which the Company believes will benefit its shareholders. See
"-- Financial Conditions -- Liquidity and Capital Resources."
INDUSTRY CONDITIONS AND COMPETITION
The Company currently derives substantially all of its revenues from
offshore drilling in the U.S. Gulf of Mexico and in the Bay of Campeche.
Although the Company's rigs could, with certain modifications, work in other
areas, management believes that the U.S. Gulf of Mexico and the Bay of Campeche
currently have greater earnings potential than other markets in which its rigs
could operate. The Company's rigs are not, however, suitable for those areas,
such as the North Sea, that require hostile environment operating capabilities.
The offshore drilling business is influenced by a number of factors,
including the current and anticipated prices of oil and gas (which affect the
expenditures by oil and gas companies for exploration and production) and the
availability of drilling rigs. In particular, the Company's drilling
operations are dependent upon the level of offshore drilling activity in the
U.S. Gulf of Mexico and the Bay of Campeche offshore Mexico. Despite
occasional improvements, the market for offshore contract drilling and related
services has been depressed for most of the past ten years due primarily to
depressed oil and gas prices and an oversupply of drilling rigs.
7
<PAGE> 10
The offshore drilling market is highly competitive and no one competitor
is dominant. There has been a prolonged period of intense price competition
during which many rigs have been idle for long periods of time. Consequently,
some drilling contractors have gone out of business, sought protection under the
bankruptcy laws or consolidated with other contractors. Notwithstanding these
events, the industry remains fragmented, and the Company believes that bidding
for drilling contracts will remain highly competitive for the foreseeable
future. Certain of the Company's competitors are larger, or are subsidiaries of
larger companies, and have greater financial resources than the Company, which
may enable them to better withstand industry downturns, compete on the basis of
price, build new rigs or acquire existing rigs that become available for
purchase.
Pricing and rig water depth capabilities are generally the most
important competitive factors in the drilling industry. Other competitive
factors include the technical capabilities of specialized drilling equipment
and personnel, operational experience, rig suitability, efficiency, equipment
condition, safety record, reputation and customer relations. The Company
believes that it competes favorably with respect to all these factors.
The Company's drilling revenues depend upon rig utilization and
pricing. These variables are affected by competitive conditions and the amount
of exploration and development activity conducted by oil and gas companies.
This activity is strongly influenced by the current and projected prices of oil
and natural gas. The Company believes that, although natural gas prices have
recently weakened, the long-term outlook for natural gas prices remains
relatively positive and such outlook is favorable for offshore drilling
activity. Oil prices, however, began to weaken in October 1993 and this
weakness is believed by the Company to have contributed to lower levels of
offshore drilling in early 1994.
U.S. Gulf of Mexico
From January 1992 through October 1994, natural gas prices have been
volatile with prices ranging from a low near $1.00 in January 1992 to a high of
approximately $2.57 in October 1992 to approximately $1.34 as of the date of
this report. As of January 1992, there were 77 contracted jack-up rigs in the
U.S. Gulf of Mexico and the number declined until early May 1992 when the
number of contracted jack-up rigs reached a 1992 low of 46. Since May 1992,
the number of contracted jack-up rigs has generally increased, reaching its
highest level since 1990, 116 rigs as of mid-October 1994.
The Company believes that the general improvement in natural gas prices
from January 1992 through February 1994 had a positive effect on drilling
activity in the U.S. Gulf of Mexico. Overall, jack-up rig demand in the U.S.
Gulf of Mexico has improved substantially since May 1992, but there can be no
assurance that such improvements in drilling activity are indicative of future
activity levels or that there will not be a decline in drilling activity in the
future. Also, recent weakness in natural gas prices could cause future
weakness in jack-up demand. Furthermore, jack-up rigs are mobile and
competitors have moved and could move additional rigs from weaker markets to
the U.S. Gulf of Mexico or offshore Mexico in the Bay of Campeche, and there
are additional non-marketed rigs stacked in the U.S. Gulf of Mexico which,
subject to some expenditure, have been or could be reactivated to meet any
increase in demand for drilling rigs in the Company's markets. Such rig
movements or reactivations could depress pricing levels and adversely affect
the supply and demand relationship in the U.S. Gulf of Mexico.
8
<PAGE> 11
The Company's third quarter 1994 results were adversely affected by a
drop in marketed rig utilization to 92% compared to 99% during the third
quarter 1993. Day rates declined when compared to 1993's third quarter and
they also reflected a decline from the levels experienced in late 1993. The
Company currently expects that jack-up rig demand will increase slightly in the
U.S. Gulf of Mexico during the remainder of 1994, however, it also appears that
the supply of jack-ups in that market will be more than ample to meet this
demand. Under such circumstances, day rates are unlikely to materially
improve. Moreover, if the recent weakness in natural gas prices were to
adversely affect rig demand, day rates could decrease.
According to Offshore Data Services, as of October 17, 1994, there were
140 jack-up rigs in the U.S. Gulf of Mexico of which 115 were contracted (an
81% utilization rate). Ownership of these rigs is widely dispersed among a
number of drilling contractors. As a result, no one contractor (including the
Company) is able to materially affect pricing levels in the U.S. Gulf of
Mexico.
Bay of Campeche, Offshore Mexico
According to Offshore Data Services, as of October 1, 1994, there were
10 contracted jack-up rigs in the Bay of Campeche compared to 11 contracted
jack-up rigs in early December 1992 and 18 in December 1993. These rigs are
operated by a variety of U.S.-based and Mexico-based drilling contractors. All
of the rigs in the Bay of Campeche are performing drilling services for
Petroleos Mexicanos (``Pemex''), the national oil company of the Republic of
Mexico. Some of the rigs working for Pemex are subject to contracts between
the respective drilling contractors and Pemex. Other rigs are working for
turnkey companies which, in turn, have entered into turnkey contracts with
Pemex. Two of the Company's rigs worked in the Bay of Campeche for a Mexican
turnkey operator, Perforadora Faja de Oro, S.A. de C.V. (``Faja de Oro'')
during all or part of 1993. The Company's contracts with Faja de Oro provided
for compensation on a ``day work'' basis (and not on a turnkey or fixed price
basis) and for each rig to drill three wells. The rigs completed their
contracts and returned to the U.S. Gulf of Mexico in September 1993 and January
1994, respectively. In May 1993, the Company entered into a one-year bareboat
charter and limited operating contract with Industrial Perforadora de Campeche,
S.A. de C.V. (``IPC''), with a six-month renewal at the option of IPC, to
provide drilling services in the Bay of Campeche. The rig commenced operations
under the contract in May 1993. In April 1994, IPC exercised its six-month
renewal option, extending the contract to November 1994, however, IPC could
elect to terminate this contract prior to that time. The Company is currently
negotiating a possible six-month extension of this contract (to May 1995). The
Company considers the Bay of Campeche to be a potentially lucrative market and
continues to actively market its fleet in this area.
Pemex's current activity levels reflect an increase compared to recent
years but is currently lower than 1993's levels. If Pemex were to elect to
reduce its activity levels further, the Company's operations could be adversely
affected. The Company currently has no reason to believe that Pemex will
reduce its drilling budgets from their current levels.
9
<PAGE> 12
The following table sets forth certain industry and Company historical
data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
--------------------- -------------------- ---------------
1994 1993 1994 1993 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INDUSTRY(1):
U.S. Gulf of Mexico:
Total jack-up rigs . . . . . . . . 139 119 134 114 116 121
Working jack-up rigs . . . . . . . 105 98 100 91 91 59
Utilization . . . . . . . . . . . 76% 82% 75% 80% 77% 49%
All other markets:
Total jack-up rigs . . . . . . . . 253 274 257 280 277 277
Working jack-up rigs . . . . . . . 189 236 195 241 217 220
Utilization . . . . . . . . . . . 75% 86% 76% 86% 78% 79%
COMPANY(2):
Total jack-up rigs . . . . . . . . 12 11 12 11 11 15
Working jack-up rigs . . . . . . . 10 10 10 10 10 6
Utilization . . . . . . . . . . . 83% 91% 83% 91% 91% 40%
Non-marketed rigs . . . . . . . . 1 1 1 1 1 7
Utilization of marketed rigs . . . 92% 99% 83% 98% 97% 73%
Average day rates(3) . . . . . . . $18,616 $23,054 $20,133 $22,292 $23,019 $13,816
</TABLE>
(1) Average of weekly data published by Offshore Data Services.
(2) The numbers included in the table represent the average number of rigs
(rounded to the nearest whole number) operated by the Company for the
periods indicated.
(3) ``Average day rate'' is determined by dividing the total gross revenue
earned by the Company's rigs during a given period by the total number of
days that the Company's rigs were under contract and working during that
period.
FINANCIAL CONDITION -- GENERAL
The following is a discussion of the Company's financial condition,
results of operations, historical financial resources and working capital. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
During most of 1992, demand for drilling services in the U.S. Gulf of
Mexico was generally depressed due primarily to the uncertainty and occasional
volatility of oil and gas prices, as well as an oversupply of jack-up drilling
rigs. During the latter part of 1992, the demand for drilling services in the
U.S. Gulf of Mexico improved markedly from earlier levels, which, combined with
a continued decline in the supply of jack-up rigs, resulted in generally higher
jack-up rig utilization and day rates. The Company attributes this improvement
in demand primarily to the increased price of domestic natural gas during that
period. Demand continued to improve during early 1993 due primarily to
increased drilling activity in the Bay of Campeche by Pemex, which drilling
activity further reduced the supply of jack-up rigs in the U.S. Gulf of Mexico.
In addition, demand for jack-up rigs in the U.S. Gulf of Mexico showed general
improvement throughout 1993. Oil prices have been generally weaker since
October 1993, however, and this weakness is believed by the Company to have
contributed to lower levels of offshore drilling in early 1994. Oil prices
improved moderately during the second quarter of 1994 and that increase may have
a positive effect on offshore drilling activity. The recent weakness in natural
gas prices, however, may more than offset any such effect.
10
<PAGE> 13
Prior to 1993, the Company derived most of its revenues from contract
drilling in the U.S. Gulf of Mexico. During 1993, the Company operated two to
three rigs in the Bay of Campeche and received a significant amount of revenues
therefrom. As of the date of this report, the Company had one rig operating in
the Bay of Campeche.
During 1992 and the first quarter of 1993, the Company completed a
series of related transactions which significantly restructured and
recapitalized the Company (the ''Recapitalization''). Primarily as a result of
the Recapitalization, between January 1, 1992 and early 1993, the Company
eliminated preferred stock obligations of approximately $64,000,000 and
indebtedness of approximately $148,000,000. The Company's rig fleet was also
reduced during that period from 21 rigs to 11 rigs.
The Company's financial results improved markedly during the fourth
quarter of 1992 and throughout 1993 due to the improvements in business
conditions noted above and the effects of the Recapitalization.
During the first nine months of 1994, the Company remained profitable,
although profits were lower than comparable 1993 results due to the effects of
(i) increased competition in the U.S. Gulf of Mexico which adversely affected
utilization and rig pricing in that market, as well as (ii) lower activity
levels in the Bay of Campeche.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company had working capital at September 30, 1994 of $41,779,000 as
compared to working capital of $32,089,000 at December 31, 1993. The
improvement in working capital was due primarily to an increase in cash
generated by operations. Net cash provided by operating activities was
$11,226,000 for the nine months ended September 30, 1994 as compared to net cash
provided by operations of $19,978,000 for the nine months ended September 30,
1993, a decrease of 44%. Cash used in investing activities was $18,918,000 for
the nine months ended September 30, 1994 which consisted primarily of the
purchase of short-term investments compared to cash used in investing activities
of $4,086,000 for the nine months ended September 30, 1993. Capital
expenditures for the nine months ended September 30, 1994 were $2,076,000, of
which approximately $967,000 was used to purchase drill pipe, and the balance
was primarily for rig upgrades as discussed below.
The Company has recently commenced a program to upgrade the operational
capabilities of eight of its rigs during the next twelve months at an aggregate
cost of approximately $25,000,000. The upgrades consist of (i) converting the
power systems of six mechanically powered rigs, (ii) adding top drive to those
rigs, (iii) adding a top drive to the MARINE 303, (iv) increasing the water
depths of the MARINE 304 and (v) adding a cantilever feature to the MARINE 304.
The actual level of expenditures for upgrades which the Company will complete
will be dependent upon market conditions and changes in the Company's financial
position. The Company recently obtained a $35,000,000 financing commitment from
a domestic financial institution which the Company expects to finalize in
mid-November 1994. The Company currently intends to utilize that facility to
finance the rig upgrade program and to acquire additional rigs.
11
<PAGE> 14
On October 3, 1994, the Company and M/V Enterprise Limited Partnership
("MV") entered into an agreement providing for the acquisition by the Company
of the MARINE 3, an offshore jack-up drilling rig, for total consideration of
$5,500,000 consisting of 1,056,000 shares of common stock, subject to certain
adjustments, plus certain additional cash consideration. The acquisition of the
rig is expected to be consummated on or about November 21, 1994. In connection
with the purchase, the Company and MV entered into a Registration Rights
Agreement dated October 3, 1994 whereby the Company agreed, among other things,
to register under the Securities Act the shares of Common Stock issued to MV in
connection with the acquisition of the rig. The Company currently charters the
MARINE 3 from MV pursuant to a two-year bareboat charter dated December 21,
1992. The charter commenced in January 1993 and will be terminated concurrently
with the purchase of the rig.
The Company is also actively pursuing the acquisition of additional rigs
to complement its fleet. The Company would likely use debt or equity financing
for all or a portion of such rig acquisition costs. At this time the Company
cannot predict whether it will be successful in acquiring any additional rigs,
and obtaining financing therefor, on terms it finds acceptable.
The Company expects to manage any rig upgrades and acquisitions of rigs
and any related financing in a manner that will not impair its ability to meet
its operational, capital expenditure and debt service requirements (if
applicable) for the foreseeable future.
The Company also intends to pursue business combinations with other
drilling contractors. From time to time, the Company has had discussions, and
anticipates that such discussions will continue in the future, with other
parties regarding business combinations. The Company cannot predict the outcome
of such discussions.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1993
Revenues
Revenues for the nine months ended September 30, 1994 decreased
$6,243,000 (11%) from $58,681,000 to $52,438,000 compared to the same period in
1993. The decrease in revenues was the result of three factors -- (i) a 10%
decrease in average day rates from $22,292 in 1993 to $20,133 in 1994, (ii) a
10% increase in the average number of marketed rigs from 10 in 1993 to 11 in
1994 and (iii) a decrease in utilization of marketed rigs from 98% in 1993 to
83% in 1994. The decrease in utilization was due to increased competition in
the U.S. Gulf of Mexico as previously discussed. See "-- Industry Conditions
and Competition." As of September 30, 1994, the Company had one rig in the Bay
of Campeche, Mexico. Revenues from the Bay of Campeche market decreased
$13,425,000 (71%) from $19,040,000 during the 1993 period to $5,615,000 for the
same period in 1994. Revenues from the Bay of Campeche market accounted for 11%
of the Company's revenues in 1994 compared to 32% in 1993. Operating income
from this market decreased $4,559,000 (67%) from $6,781,000 in the 1993 period
to $2,222,000 for the same period in 1994. This decrease is mainly attributable
to a decrease in the number of the Company's rigs present in the Bay of Campeche
from three rigs as of September 30, 1993 to one rig during the third quarter
1994.
12
<PAGE> 15
Costs and Expenses
Contract drilling expenses for the nine months ended September 30, 1994
increased $5,107,000 (16%) from $32,945,000 to $38,052,000 compared to the
same period in 1993. This increase is primarily the result of the addition of
two rigs to the Company's active rig fleet in late 1993. The MARINE 225
(formerly the MARINE 1) was refurbished and operated from October 1993 to May
1994 and the MARINE 304 was purchased, refurbished and activated in late 1993.
Depreciation and amortization expense for the nine months ended
September 30, 1994 increased $1,800,000 (46%) from $3,927,000 to $5,727,000
compared to the same period in 1993. The increase resulted primarily from the
purchase of the MARINE 304 in August 1993 and the reactivation and
refurbishment of the MARINE 225 and the refurbishment of the MARINE 303 in the
fourth quarter of 1993.
General and administrative expenses for the nine months ended September
30, 1994 decreased $4,103,000 (59%) from $6,920,000 to $2,817,000 compared to
the same period in 1993. The decrease is primarily the result of one-time
executive bonuses accrued for the nine months ended September 30, 1993 of
$3,725,000. Excluding the one-time executive bonuses in 1993 of $3,725,000,
general and administrative expenses decreased $378,000 (12%) from $3,195,000 to
$2,817,000.
Interest Expense
There was no interest expense for the nine months ended September 30,
1994 as a result of the Company's repayment of all debt during 1993. Interest
expense for the nine months ended September 30, 1993 was $580,000.
Interest Income
Interest income for the nine months ended September 30, 1994 increased
$485,000 from $296,000 to $781,000 compared to the same period in 1993. The
increase was related primarily to increased cash balances resulting from 1993
stock offering proceeds and cash flows from operations, as well as increased
interest rates on short-term investments.
Income Taxes
Income taxes of $2,325,000 for the nine months ended September 30, 1994
consisted of taxes currently payable of $129,000 and deferred income taxes of
$2,196,000. Taxes currently payable represent federal alternative minimum tax
of $128,000 and state franchise tax of $1,000.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1993
Revenues
Revenues for the third quarter of 1994 decreased $3,513,000 (17%) from
$20,906,000 to $17,393,000 compared to the same period in 1993. The decrease
in revenues was the result of three factors -- (i) a 19% decrease in average
day rates from $23,054 in 1993 to $18,616 in 1994, (ii) a 10% increase in the
average number of marketed rigs from 10 in 1993 to 11 in 1994
13
<PAGE> 16
and (iii) a decrease in utilization of marketed rigs from 99% in 1993 to 92% in
1994. The decrease in utilization was due to increased competition in the U.S.
Gulf of Mexico as previously discussed. See `` -- Industry Conditions and
Competition.'' As of September 30, 1994, the Company had one rig in the Bay of
Campeche, Mexico. Revenues from the Bay of Campeche market decreased
$5,240,000 (75%) from $7,031,000 during the 1993 period to $1,791,000 for the
same period in 1994. Revenues from the Bay of Campeche market accounted for
10% of the Company's revenues in the third quarter of 1994 compared to 34% in
the third quarter of 1993. Operating income from this market decreased
$1,775,000 (74%) from $2,401,000 in the 1993 period to $626,000 for the same
period in 1994. This decrease is mainly attributable to a decrease in the
number of the Company's rigs present in the Bay of Campeche from three in 1993
to one in 1994.
Costs and Expenses
Contract drilling expenses for the third quarter of 1994 increased
$2,258,000 (21%) from $10,854,000 to $13,112,000 compared to the same period in
1993. This increase is primarily the result of an increase in rig operating
costs and the addition of the MARINE 304 in 1994. The MARINE 304 was purchased
in August 1993 and refurbished in the fourth quarter of 1993.
Depreciation and amortization expense for the third quarter of 1994
increased $643,000 (49%) from $1,310,000 to $1,953,000 compared to the same
period in 1993. The increase resulted primarily from the purchase of the
MARINE 304 in August 1993 and the reactivation and refurbishment of the MARINE
225 and the refurbishment of the MARINE 303 in the fourth quarter of 1993.
General and administrative expenses for the third quarter of 1994
decreased $1,948,000 (67%) from $2,910,000 to $962,000 compared to the same
period in 1993. The decrease is primarily the result of one-time executive
bonuses accrued in the third quarter of 1993 of $1,414,000. Excluding the
one-time executive bonuses in 1993 of $1,414,000, general and administrative
expenses decreased $534,000 (36%) from $1,496,000 for the third quarter of 1993
compared to $962,000 in the third quarter of 1994. The decrease is a result of
higher professional fees and related travel expenses in 1993 related to a stock
offering in mid-1993.
Interest Expense
There was no interest expense for the third quarter of 1994 as a result
of the Company's repayment of all debt during 1993. Interest expense for the
third quarter of 1993 was $83,000.
Interest Income
Interest income for the third quarter of 1994 increased $208,000 from
$219,000 to $427,000 compared to the same period in 1993. The increase was
related primarily to increased cash balances resulting from 1993 stock offering
proceeds and cash flows from operations, as well as increases in the interest
rates on short-term investments.
Income Taxes
Income taxes of $606,000 for the third quarter of 1994 consisted of
taxes currently payable of $47,000 and deferred income taxes of $559,000.
Taxes currently payable represent federal alternative minimum taxes of $47,000.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has various claims filed against its subsidiaries in the
ordinary course of business, particularly claims alleging personal injuries.
It is the belief of management that the Company has established adequate
reserves for any liabilities which may reasonably be expected to result from
these claims. In the opinion of management, no pending claims, actions or
proceedings against the Company would have a material adverse effect on its
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the third quarter of
1994.
15
<PAGE> 18
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.
MARINE DRILLING COMPANIES, INC.
(Registrant)
Date: October 24, 1994 By /s/ William H. Flores
_________________________________
William H. Flores
Senior Vice President - Chief
Financial Officer and
Director (Principal Financial
Officer)
Date: October 24, 1994 By /s/ Joan R. Smith
_________________________________
Joan R. Smith
Vice President, Controller and
Secretary (Principal
Accounting Officer)
16
<PAGE> 19
Index to Exhibits
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
BASED ON "INTERIM YTD. PERIOD" - 9 MO'S
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 14,277
<SECURITIES> 17,394
<RECEIVABLES> 14,085
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,847
<PP&E> 89,121
<DEPRECIATION> 11,003
<TOTAL-ASSETS> 125,650
<CURRENT-LIABILITIES> 5,068
<BONDS> 0
<COMMON> 439
0
0
<OTHER-SE> 110,368
<TOTAL-LIABILITY-AND-EQUITY> 125,650
<SALES> 52,438
<TOTAL-REVENUES> 52,438
<CGS> 38,052
<TOTAL-COSTS> 38,052
<OTHER-EXPENSES> 5,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,644
<INCOME-TAX> 2,325
<INCOME-CONTINUING> 4,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,319
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
