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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 MARCH 31, 1997
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
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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)
ONE SUGAR CREEK CENTER BLVD., SUITE 600, SUGAR LAND, TEXAS 77478-3556
(Address of principal executive offices and zip code)
(281) 243-3000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
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 AT MAY 6, 1997 -- 51,405,068
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MARINE DRILLING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Index to Financial Statements
Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
(i)
<PAGE> 3
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Marine
Drilling Companies, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of operations and cash flows for the three-month
periods ended March 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Marine Drilling Companies, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 24, 1997, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1996 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
KPMG PEAT MARWICK LLP
Houston, Texas
April 18, 1997
1
<PAGE> 4
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 48,738 $ 69,761
Restricted cash 4,200 2,200
Short-term investments 19,753 9,990
Accounts receivable - trade and other, net 32,772 21,378
Inventory 718 897
Prepaid expenses and other 508 1,461
--------- ---------
Total current assets 106,689 105,687
Property and Equipment 195,091 182,200
Less accumulated depreciation 36,788 33,463
--------- ---------
Property and equipment, net 158,303 148,737
Other 1,373 523
--------- ---------
$ 266,365 $ 254,947
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 1,000
Accounts payable 6,552 3,249
Accrued expenses 5,934 4,284
Current tax liability 1,039 --
Employer's liability claims, current 941 483
--------- ---------
Total current liabilities 14,466 9,016
Long-Term Debt -- 9,000
Employer's Liability Claims, non-current 1,220 1,469
Deferred Income Taxes 14,259 13,729
Shareholders' Equity:
Common stock, par value $.01. Authorized 200,000,000 shares;
issued and outstanding 51,398,288 and 51,262,519 shares,
as of March 31, 1997 and December 31, 1996, respectively 514 513
Common stock restricted (1,579) (628)
Additional paid-in capital 190,451 184,992
Retained earnings from January 1, 1993 47,034 36,856
--------- ---------
Total shareholders' equity 236,420 221,733
--------- ---------
Commitments and contingencies -- --
--------- ---------
$ 266,365 $ 254,947
========= =========
</TABLE>
See notes to consolidated financial statements and accompanying
accountants' review report.
2
<PAGE> 5
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 36,750 $ 21,239
Costs and Expenses:
Contract drilling 16,476 13,532
Depreciation and amortization 3,581 2,697
General and administrative 1,781 1,410
---------- ----------
21,838 17,639
---------- ----------
Operating income 14,912 3,600
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Other Income (Expense):
Interest expense (350) (181)
Interest income 1,057 192
Other income (expense) 40 58
---------- ----------
747 69
---------- ----------
Income before income taxes 15,659 3,669
Income tax expense 5,481 1,357
---------- ----------
Net income $ 10,178 $ 2,312
========== ==========
Income per common share $ 0.20 $ 0.05
========== ==========
Weighted average common shares
outstanding 51,329,966 43,804,288
========== ==========
</TABLE>
See notes to consolidated financial statements and accompanying
accountants' review report.
3
<PAGE> 6
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 10,178 $ 2,312
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes 575 567
Pre-quasi-reorganization net operating loss carryforward 2,952 --
Tax benefits related to common stock issued pursuant to
long-term incentive plan 842 652
Depreciation and amortization 3,581 2,697
Gain on disposition of equipment (26) (57)
Accrual of compensation expense, net 130 96
Issuance of common stock to Employee 401(k) Plan
and the Non-Employee Directors' Plan 288 214
Amortization of interest income (249) --
Changes in operating assets and liabilities:
Receivables (11,394) 2,943
Other current assets 1,132 108
Payables, accrued expenses, current taxes and
employer's liability claims 6,156 (751)
Other (1,090) --
--------- ---------
Net cash provided by operating activities 13,075 8,781
--------- ---------
Cash Flows From Investing Activities:
Purchase of short-term investments (19,514) --
Maturity of short-term investments 10,000 --
Purchase of equipment (12,926) (6,660)
Proceeds from disposition of equipment 45 197
--------- ---------
Net cash used in investing activities (22,395) (6,463)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 297 563
Payment of debt (10,000) --
Increase in restricted cash (2,000) --
--------- ---------
Net cash provided by (used in) financing activities (11,703) 563
--------- ---------
Net increase (decrease) in cash and cash equivalents (21,023) 2,881
Cash and cash equivalents at beginning of period 69,761 12,260
--------- ---------
Cash and cash equivalents at end of period $ 48,738 $ 15,141
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 392 $ 219
Income taxes paid $ 118 $ 73
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 62,000 and 47,500 shares in 1997 and 1996
respectively, of restricted common stock $ 1,081 $ 240
</TABLE>
See notes to consolidated financial statements and accompanying
accountants' review report.
4
<PAGE> 7
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements of Marine Drilling Companies,
Inc. (the "Company" or the "Registrant") 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.
The financial data for the three months ended March 31, 1997 included herein
has been subjected to a limited review by KPMG Peat Marwick LLP, the
Registrants' independent public accountants, whose report is included herein.
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, 1996. The results of operations for the
three months ended March 31, 1997 are not necessarily indicative of the results
of operations that may be expected for the year.
(2) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
Effective December 1997, the Company will be required to adopt Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 introduces the concept of basic earnings per share, which represents net
income divided by the weighted average common shares outstanding - without the
dilutive effects of common stock equivalents (options, warrants, etc.) Diluted
earnings per share, giving effect for common stock equivalents, will be reported
when SFAS 128 is adopted in the fourth quarter of 1997.
(3) INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current:
U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,039 $ 65
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 73
------ ------
1,112 138
------ ------
Other:
U.S. federal - deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . 575 567
Pre-quasi-reorganization net operating loss carryforwards . . . . . . . . . . 2,952 -
Tax benefits related to common stock issued pursuant
to long-term incentive plan . . . . . . . . . . . . . . . . . . . . . . . 842 652
------ ------
4,369 1,219
------ ------
Total tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,481 $1,357
====== ======
</TABLE>
For the three months ended March 31, 1997 and 1996, the effective tax rate
for financial reporting purposes was 35% and 37% respectively, which
approximates the U.S. federal statutory rate of 35%. The effective rate was
higher than the statutory rate in 1996 due to the Company's treatment of
foreign tax payments.
5
<PAGE> 8
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1997 and December 31, 1996 are presented below.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .............................. $ 21,113 $ 24,065
Investment tax, general business and alternative
tax credit carryforwards ................................. 4,862 4,862
Employer's liability claims ................................... 756 683
Allowance for bad debts ....................................... 53 53
-------- --------
Total gross deferred tax assets ............................... 26,784 29,663
Less valuation allowance ...................................... (25,983) (28,980)
-------- --------
Net deferred tax assets ....................................... 801 683
-------- --------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation .......................................... 14,073 13,344
Deferred intercompany gains and losses ........................ 987 1,068
-------- --------
Total gross deferred tax liabilities .......................... 15,060 14,412
-------- --------
Net deferred tax liability ........................................ $ 14,259 $ 13,729
======== ========
</TABLE>
(4) NET INCOME PER COMMON SHARE
Net income per common share for the three months ended March 31, 1997 and
1996 excludes the effect of outstanding stock options inasmuch as the potential
dilution from their exercise is less than three percent.
(5) 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) SUBSEQUENT EVENT
The Company recently executed an agreement to acquire the DEEPSEA
STAVANGER from Deep Sea ASA ("Deep Sea") at a price of $54,500,000. The
DEEPSEA STAVANGER is a newbuild Bingo 8000 design bare-deck hull which,
dependent upon completion of construction and final outfitting, can be
configured as either a fourth or fifth-generation semi-submersible. The rig,
currently located in Norway, will be named the MARINE 700.
In addition to the foregoing, the Company obtained an option to acquire
under certain circumstances approximately 48% of the outstanding shares of Deep
Sea ASA currently held by its two largest shareholders. Deep Sea is a Norwegian
company traded on the Oslo stock exchange whose primary asset is the DEEPSEA
STAVANGER. If the Company is successful in acquiring two-thirds or more of the
outstanding shares of Deep Sea, the rig acquisition agreement may be terminated
and the Company would become the primary shareholder thereof.
6
<PAGE> 9
MARINE DRILLING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The Company subsequently commenced a voluntary tender offer pursuant to
Norwegian law to acquire 100% of the outstanding shares of Deep Sea. As of May
9, 1997, the Company's tender had been accepted by approximately 86% of Deep
Sea's shareholders and the Company has notified Deep Sea that it intends to
acquire those tendered shares at an aggregate price of approximately $45.9
million. The Company anticipates that it will close this transaction on or
about May 21, 1997. In addition, pursuant to Norwegian law, the Company will
have to make a mandatory tender offer in early June for the remaining shares
that were not tendered under the voluntary tender offer. If all of the
remaining shares are tendered, the Company will expend approximately $7.6
million for those shares.
The MARINE 700 will require additional expenditures to complete its
construction and equip it for service. At this time, the Company is conducting
a detailed engineering study to determine the cost of these activities. The
Company plans to obtain a term contract of significant length prior to making
significant additional expenditures related to the rig. The Company's
preliminary analysis indicates that these additional expenditures will be in the
range of $140,000,000 to $175,000,000. This estimate could change materially
based upon further analysis and customer requirements. The funding of the
acquisition of Deep Sea (including the ownership of the rig) will be from the
Company's working capital. The sources of funding for the future rig completion
expenditures have not yet been determined.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q, particularly the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain 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, that are not historical facts concerning,
among other things, market conditions, the demand for offshore drilling
services, future acquisitions and fleet expansion, future financings, future
rig contracts, future capital expenditures including rig upgrades and
refurbishments, and future results of operations. Actual results may differ
materially from those included in the forward-looking statements, and no
assurance can be given that the Company's expectations will be realized or
achieved. Important factors and risks that could cause actual results to
differ materially from those referred to in the forward-looking statements
include (i) one or more prolonged reductions in oil or gas prices; (ii) the
inadequacy of insurance and indemnification to protect the Company against
liability from all consequences of well disasters, fire damage or environmental
damage; (iii) the inability of the Company to obtain insurance at reasonable
rates; (iv) a decrease in the demand for offshore drilling rigs especially in
the U.S. Gulf of Mexico or for slot jack-up rigs; (v) the risks attendant with
operations in foreign countries including actions that may be taken by foreign
countries and actions that may be taken by the United States against foreign
countries; (vi) the failure of the Company to successfully compete with the
Company's competitors that are larger and have a greater diversity of rigs and
greater financial resources than the Company; (vii) a decrease in rig
utilization resulting from reactivation of currently inactive non-marketed rigs
or new construction of rigs; (viii) the risks of delay and cost overruns
attendant to large construction projects such as the upgrade and refurbishment
of certain of the Company's rigs, including shortages of material or skilled
labor, engineering problems, latent defects or damage to current equipment,
work stoppages, weather interference and inability to obtain requisite permits
or approvals; (ix) the return of market and other conditions similar to those
in which the Company incurred net losses before extraordinary items for each of
the years ended December 31, 1991, 1992 and 1995; (x) the loss of key
management personnel or the inability of the Company to attract and retain
sufficient qualified personnel to operate its rigs; (xi) the risk that labor
shortages could result in material wage increases; (xii) the adoption of
additional laws or regulations that limit or reduce drilling opportunities or
that increase the cost of drilling or increase the potential liability of the
Company; (xiii) the occurrence of risks attendant to contract drilling
operations including blowouts, cratering, fires and explosions, capsizing,
grounding or collision involving rigs while in operation, mobilization or
otherwise or damage to rigs from weather, sea conditions or unsound location;
(xiv) adverse uninsured litigation results; and (xv) an adverse outcome with
respect to the Company's treatment of its net operating losses generated prior
to 1993.
OVERVIEW
Demand for offshore drilling services is primarily driven by the
economics of oil and gas exploration, development and production, which in turn,
are closely linked to current and projected oil and gas prices. Since the
mid-1980's, oil and gas prices have been volatile and generally lower than
prices experienced during the early 1980's, resulting in volatile and generally
reduced demand for offshore drilling services. In addition, during the early
1980's, the industry built a substantial number of new offshore drilling rigs.
Since 1993, the worldwide offshore drilling market has shown general improvement
compared to the 1986-1992 period. This improvement can be generally attributed
to improved offshore rig demand and a continuing reduction in offshore rig
supply. Although this period can be characterized as showing general
improvement, certain significant offshore markets have experienced short periods
of reduced rig demand and/or excess rig supply. During those periods of low rig
utilization, day rates were adversely impacted and drilling contractors
competing in those markets suffered poorer financial results until rig demand
improved or rigs left those markets for other markets.
8
<PAGE> 11
DRILLING MARKETS AND UTILIZATION
General
Since 1995, most of the world's significant offshore drilling markets
have experienced improved rig utilization and day rates. According to Offshore
Data Services, as of May 6, 1997, worldwide jack-up utilization was 89% (334
rigs working out of a supply of 377 rigs) compared to 83% average utilization
(317 rigs working out of a supply of 384 rigs) during the first three months of
1996. Worldwide semi-submersible rig utilization as of May 6, 1997 was 80%
(115 rigs working out of a supply of 144 rigs) compared to 74% average
utilization (106 rigs working out of a supply of 143 rigs) during the first
three months of 1996.
Prior to 1996, the Company derived substantially all of its revenues from
offshore drilling in the U.S. Gulf of Mexico and the Bay of Campeche (offshore
Mexico). Six of the Company's rigs, the MARINE 201, MARINE 300, MARINE 303,
MARINE 304, MARINE 305 and MARINE 500, are configured to work in international
markets outside the U.S. Gulf of Mexico. Three of these rigs, the MARINE 201,
MARINE 305 and MARINE 500, are currently operating or have contracts to operate
internationally. The Company's other rigs could, if applicable modifications
were made and certifications obtained, operate in certain areas outside of the
U.S. Gulf of Mexico. The Company's rigs are not, however, suitable for areas,
such as the North Sea, that require enhanced environmental operating
capabilities.
Contract terms in the offshore drilling business range from well-to-well
contracts that are very short in length, e.g. 30 days, to long term contracts of
three or more years. Until recently, drilling contracts for jack-up rigs in the
Company's primary operating area, the U.S. Gulf of Mexico, have been
predominately short term well-to-well contracts. On the other hand, longer term
contracts have been more common (i) in most international drilling markets for
jack-up rigs and (ii) in several worldwide markets for deep water rigs, i.e.
semi-submersible rigs and drillships. Due to the highly cyclical nature of the
offshore drilling business, the Company seeks longer-term contracts for the
employment of a portion of its rig fleet, both domestically for deep water
assets and internationally for jack-ups. Such contracts help mitigate the
volatility of the Company's results.
At the present time, the Company has long term international contracts for
two of its jack-ups, the MARINE 201 and the MARINE 305. The MARINE 201 is
operating in India under a one-year contract that started in November 1995. The
contract includes eight three-month extension options, four of which have been
exercised by its customer, that will provide for the rig's employment through at
least November 1997. Based upon conversations with the rig's customer, the
Company currently expects this contract to be extended (pursuant to extension
options) into 1998. The MARINE 305 has received a one-year contract with a
major oil company commencing in the third quarter in Southeast Asia. This
contract includes options that could, if exercised, extend its term for up to an
additional year. The rig, which was acquired in August 1996, is currently being
upgraded and refurbished in the Middle East. In addition to the foregoing term
contracts, the Company's semi-submersible rig, the MARINE 500, is contracted in
Southeast Asia under two contracts that provide for the rig's employment through
November 1997 (or through April 1998 if all extension options are exercised).
The Company is currently seeking to obtain a long-term contract for this rig for
operations in deeper water depths (1,500 feet to 5,000 feet). If the Company is
successful in obtaining such a contract, it will upgrade the rig to meet the
technical characteristics required by the specific contract.
U.S. Gulf of Mexico
The jack-up drilling market in the U.S. Gulf of Mexico is highly
competitive. A significant number of offshore drilling companies have rigs in
this market and, as a result, no one contractor is able to materially affect
pricing levels. Day rates can and have fluctuated significantly on relatively
small changes in the rig supply and demand situation in this market.
Throughout the period from late 1992 through 1994, jack-up operations in the
U.S. Gulf of Mexico were characterized by improving rig demand. In late 1994
and early 1995, however, the combination of reduced jack-up demand and
increased rig supply had a depressing effect on U.S. Gulf of Mexico operations.
During this period of reduced utilization, day rate levels fell and contractors
experienced reduced levels of earnings.
9
<PAGE> 12
Since mid-1995, a combination of improved jack-up rig demand and rig
mobilizations to other international markets has resulted in improved jack-up
utilization and day rates. Improved utilization of jack-up rigs in the U.S.
Gulf of Mexico during the third and fourth quarters of 1995 continued into and
throughout 1996 and is still continuing during the first quarter of 1997.
Utilization of jack-up rigs in this market as of May 6, 1997 was 89% (119 rigs
working out of a supply of 133 rigs) as compared with an average of 83% (114
rigs working out of a supply of 137 rigs) for the first three months of 1996.
With 12 of its 14 jack-up rigs located in the U.S. Gulf of Mexico, the Company
is well positioned to benefit from the improved rig demand in this market.
Bay of Campeche
During most of 1993 and early 1994, demand for jack-up rigs was strong
in the Bay of Campeche, offshore Mexico in the southern Gulf of Mexico. The
Bay of Campeche drilling market, however, generally deteriorated in late 1994
and early 1995. The Company has had a significant presence in the Bay of
Campeche in prior years and is continuing to actively market its fleet in the
Bay of Campeche. Demand for rigs in the Bay of Campeche has dropped from a
high of 23 rigs in 1993 to 7 rigs in 1995 and has increased to an average of 9
rigs for the first three months of 1997. Jack-up utilization in the Bay of
Campeche for the first three months of 1996 was approximately 70% (7 jack-ups
working out of a supply of 10 rigs) compared to 100% (10 jack-ups working out
of a supply of 10 rigs) as of May 6, 1997.
India
In 1995, the Company entered into a one-year term contract for the
MARINE 201 to operate off the east coast of India. That rig commenced
operations under this contract in mid-November 1995. Under the contract, the
customer has options to extend the contract for up to eight three-month
periods, four of which have been exercised ensuring this rig's employment
through November 1997. Annual demand for jack-ups in India has generally
averaged between 20 to 26 rigs during the past few years. During this time,
jack-up utilization has been stable in the range of 89% to 93%. The government
of India recently approved investment in the oil and gas sector by non-Indian
energy companies. As a result of these actions, jack-up rig demand has
recently increased, and most industry analysts expect that demand could
increase further in the near term.
Southeast Asia
In January 1997, the Company entered into a one-year contract with a
major oil company for the MARINE 305 to begin work in Southeast Asia. The
contract will begin in the third quarter of 1997 and is expected to generate
total revenues of approximately $28,000,000. In December 1996, the Company
acquired the MARINE 500, a second-generation semi- submersible rig. The rig
began operating in late February and is currently drilling offshore Indonesia
on a short-term contract. In April, the Company signed another short-term
contract to drill three wells with three option wells. The Company will
continue to seek long-term contracts for both rigs in this market. There are
currently 24 jack-ups and 12 semi-submersibles in this market as of May 6, 1997
with working utilization at 54% for jack-ups and 83% for semi- submersibles.
Utilization based upon rigs under contract is currently 92% for jack-ups and
100% for semi-submersibles, primarily due to rigs in the shipyard which have
not yet started working under their respective contracts. Thus, utilization in
this market is currently strong.
10
<PAGE> 13
The following table sets forth certain industry and Company historical
data for the periods indicated. Industry data includes many rigs that are
dissimilar to the Company's rigs in terms of performance capabilities, age,
operational criteria and environmental capabilities. Certain of the Company's
competitors operate rigs other than jack- up rigs that can compete with jack-up
rigs under certain circumstances.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------------- ---------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INDUSTRY(1):
U.S. GULF OF MEXICO:
Total jack-up rigs ................. 134.8 137.2 135.9 140.1
Working jack-up rigs ............... 119.5 113.5 118.5 104.6
Utilization ........................ 89% 83% 87% 75%
Total semi-submersible rigs ........ 33.4 28.8 30.4 24.2
Working semi-submersible rigs ...... 22.8 22.1 22.0 16.8
Utilization ........................ 68% 77% 72% 69%
ALL OTHER MARKETS:
Total jack-up rigs ................. 243.3 246.7 246.0 246.7
Working jack-up rigs ............... 211.8 203.3 208.5 197.5
Utilization ........................ 87% 82% 85% 80%
Total semi-submersible rigs ........ 111.3 114.0 112.8 117.2
Working semi-submersible rigs ...... 94.8 84.4 90.4 82.6
Utilization ........................ 85% 74% 80% 70%
COMPANY(2):
Total jack-up rigs ................. 14.0 13.0 13.4 13.0
Working jack-up rigs ............... 12.0 11.1 12.4 8.9
Utilization ........................ 86% 85% 93% 69%
Non-marketed jack-up rigs .......... 2.0 1.2 0.9 3.0
Utilization of marketed jack-up rigs 100% 94% 99% 89%
Total semi-submersible rigs ........ 1.0 -- -- --
Working semi-submersible rigs ...... 0.5 -- -- --
Utilization ........................ 50% -- -- --
Non-marketed semi-submersible rigs . 0.5 -- -- --
Utilization of marketed semi-
submersible rigs .............. 100% -- -- --
Average jack-up rig day rates(3) ... $31,796 $21,026 $24,343 $19,289
Average semi-submersible rig
day rates (3)(4) .............. $58,043 -- -- --
Average day rates for all rigs (3) . $32,768 $21,026 $24,343 $19,289
</TABLE>
- ---------------------------------
(1) Average of weekly data published by Offshore Data Services.
(2) The numbers included in the table represent the average number of rigs
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.
(4) The Company did not operate any semi-submersibles prior to 1997; therefore,
prior year data is omitted.
11
<PAGE> 14
DRILLING OPERATIONS AND CUSTOMERS
The Company's existing drilling contracts provide for compensation on a
"daywork" basis. Under daywork contracts, the Company receives a fixed amount
per day for providing drilling services using the rigs it operates. Under most
daywork contracts, the customer also pays the cost of moving the rig and
related equipment to the job site and the costs of drilling the well (other
than the costs of operating the rig, which are borne by the drilling
contractor). Daywork contracts may provide for lower rates during periods when
drilling operations are interrupted or restricted by equipment breakdowns,
adverse weather or water conditions or other conditions beyond the control of
the Company. Historically, the Company has not marketed its rigs under fixed
price or turnkey contracts.
A daywork contract generally extends over a period of time covering either
the drilling of a single well, a group of wells or a stated term. The customer
may terminate the contract if the drilling rig is destroyed or lost, or if
drilling operations are suspended for a specified period of time as a result of
breakdown of major equipment or other specific events. The duration of
drilling contracts has tended to be on a well-by-well basis, while contracts
in the deep water and international jack-up markets typically have tended to be
on a term basis. Until recently the Company's experience during recent years
has been consistent with this general rule. As a result of the substantial
improvement in the U.S. Gulf of Mexico drilling market, the Company has been
able to obtain term contracts on its domestic rigs ranging from six months to
two years. To the extent available, the Company will continue to focus upon
obtaining additional term contracts, both foreign and domestic, in the future.
The Company obtains most of its contracts through competitive bidding against
other contractors in response to oil and gas companies' solicitations of bids.
The Company's current drilling contracts, both foreign and domestic, provide
for payment in U.S. dollars.
The Company provides drilling services to a customer base that includes
independent and major oil and gas companies. As is typical in the industry,
the Company does business with a relatively small number of customers at any
given time. The loss of any one of the Company's customers could, at least on
a short-term basis, have a material adverse effect on the Company's
profitability. Management believes, however, that at current levels of
activity, the Company would have alternative customers for its services if it
lost any single customer, and that the loss of any one customer would not have
a material adverse effect on the Company on a long-term basis.
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 included in Item 1 of this
report.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
The Company had working capital at March 31, 1997 of $92,223,000 as
compared to working capital of $96,671,000 at December 31, 1996. Net cash
provided by operating activities was $13,075,000 for the three months ended
March 31, 1997 compared to $8,781,000 for the three months ended March 31,
1996, an increase of $4,294,000 or 49%. Cash used in investing activities was
$22,395,000 for the three months ended March 31, 1997 including capital
expenditures of $12,926,000 and purchases of short-term investments offset by
the maturity of short-term investments compared to cash used in investing
activities of $6,463,000 for the three months ended March 31, 1996. Capital
expenditures for the three months ended March 31, 1997 consisted of (i) the
upgrade and refurbishment of the MARINE 305, (ii) refurbishments to the MARINE
500 and (iii) purchase of drill pipe. Net cash used in financing activities
was $11,703,000 consisting of the prepayment of debt, an increase in restricted
cash and proceeds from the exercise of common stock options.
12
<PAGE> 15
Authorized Stock Repurchase
On March 7, 1995, the Company announced that its Board of Directors had
authorized the repurchase of up to 4,000,000 shares of the Company's Common
Stock. The action reflects the Company's view that its shareholders would
benefit from such repurchases. The repurchases may be effected, from time to
time, in accordance with applicable securities laws, through solicited or
unsolicited transactions in the market or in privately negotiated transactions.
No limit was placed on the duration of the repurchase program. Subject to
applicable securities laws, such repurchases shall be at such time and in such
amounts as the Company deems appropriate. Shares purchased pursuant to the
program may be issued to fund stock option exercises pursuant to the Company's
compensation plans and to make certain matching contributions to the Company's
401(k) plan. The Company currently intends to fund such repurchases from
working capital. During the first quarters of 1997 and 1996, no shares were
repurchased by the Company. In earlier periods, the Company repurchased
approximately 800,000 shares that were subsequently reissued as discussed
above. At March 31, 1997, the Company held no treasury shares and the number of
shares authorized for repurchase pursuant to its repurchase program was
4,000,000.
Credit Agreement
In March 1997, the Company entered into a new credit agreement, the "New
Loan Agreement," with Bankers Trust Company ("BTCo"), Christiania Bank og
Kreditkasse ("CBK"), and certain other banks providing financing up to
$100,000,000 to be used for rig acquisitions and upgrades. This agreement
includes a revolving credit facility available through December 31, 1999, which
can be converted into a four-year term loan. Interest and facility fees are
generally payable quarterly during the terms of both facilities. Principal
during the term loan facility is payable quarterly in equal installments
beginning March 31, 2000. Interest accrues at (i) LIBOR plus a margin of .75%
to 1.25% or (ii) prime plus a margin of 0% to .50%, with margins determined
pursuant to a debt to capital calculation. The agreement is secured by all of
the Company's current rig fleet as well as certain other collateral
assignments. The Company has no borrowings outstanding under this agreement at
March 31, 1997. In connection with the consummation of the New Loan Agreement,
the Company repaid and terminated its prior $35,000,000 credit facility with a
U.S. financial institution during February 1997.
Other Activities
In January 1997, the Company entered into a one-year contract to operate
the MARINE 305 in Southeast Asia for a major oil company. This contract is
currently expected to generate revenues of approximately $28,000,000 and will
commence upon the completion of the rig's upgrade and refurbishment activities
in the third quarter of 1997.
The Company entered into a three-well contract in April 1997 to operate
the MARINE 500 in the Gulf of Thailand. This contract includes three option
wells. If all options are exercised, the term of the contract will be
approximately 360 days. Operations are scheduled to commence the first of July
1997.
Repairs on the MARINE 15, a 250 foot mat supported slot jack-up rig,
which was damaged as a result of a fire in late November 1996, were completed
during April 1997 and the rig subsequently began operations under a one-year
contract.
Projected Capital Expenditures
The Company recently executed an agreement to acquire the DEEPSEA
STAVANGER from Deep Sea at a price of $54,500,000. The rig, currently located
in Norway, will be named the MARINE 700.
13
<PAGE> 16
In addition, the Company has obtained an option to acquire under certain
circumstances approximately 48% of the outstanding shares of Deep Sea ASA
currently held by its two largest shareholders. Deep Sea is a Norwegian company
traded on the Oslo stock exchange whose primary asset is the DEEPSEA STAVANGER.
If the Company is successful in acquiring two-thirds or more of the outstanding
shares of Deep Sea, the rig acquisition agreement may be terminated and the
Company would become the primary shareholder thereof.
The Company subsequently commenced a voluntary tender offer pursuant to
Norwegian law to acquire 100% of the outstanding shares of Deep Sea. As of May
9, 1997, the Company's tender had been accepted by approximately 86% of Deep
Sea's shareholders and the Company has notified Deep Sea that it intends to
acquire those tendered shares at an aggregate price of approximately $45.9
million. The Company anticipates that it will close this transaction on or
about May 21, 1997. In addition, pursuant to Norwegian law, the Company will
have to make a mandatory tender offer in early June for the remaining shares
that were not tendered under the voluntary tender offer. If all of the
remaining shares are tendered, the Company will expend approximately $7.6
million for those shares.
The MARINE 700 will require additional expenditures to complete its
construction and equip it for service. At this time, the Company is conducting
a detailed engineering study to determine the cost of these activities. The
Company plans to obtain a term contract of significant term prior to making
significant additional expenditures related to the rig. The Company's
preliminary analysis indicates that these additional expenditures will be in the
range of $140,000,000 to $175,000,000. This estimate could change materially
based upon further analysis and customer required features. The funding of the
acquisition of Deep Sea (including the ownership of the rig) will be from the
Company's working capital. The sources of funding for the future rig completion
expenditures have not yet been determined, however, the Company anticipates that
it will seek to obtain a nonrecourse term loan for this project subsequent to
obtaining a term drilling contract therefor.
The Company expects to spend approximately $39,000,000 in 1997 for other
capital expenditures, consisting primarily of expenditures of approximately
$29,500,000 to upgrade and refurbish the MARINE 305.
The Company will continue to pursue direct or indirect acquisitions of
additional drilling rigs and related equipment and/or businesses. Future
acquisitions, if any, would likely be funded from the Company's working
capital, the New Loan Agreement or through the issuance of debt and/or equity
securities. The Company cannot predict whether it will be successful in
acquiring additional rigs, and obtaining financing therefor, on acceptable
terms. In addition, it is currently anticipated that the Company will continue
the upgrading of rigs to enhance their capability to obtain longer term
contracts including, among other projects, water depth upgrades to the MARINE
500 and the completion of the MARINE 700. The timing and actual amounts
expended by the Company in connection with its plans to upgrade and refurbish
selected rigs, as well as the type of rig modification comprising each program
is subject to the discretion of the Company and will depend on the Company's
view of market conditions, the Company's cash flow, whether other acquisitions
are made and other factors. It is expected, however, that such programs will
involve adding top drive drilling systems, converting power systems, increasing
water-depth capabilities, adding a cantilever feature or making other
modifications to selected rigs.
With regard to fleet expansion, the Company believes that segments of
the offshore drilling market are continuing to undergo consolidation and such
consolidation may present acquisition opportunities. The Company will continue
to explore additional acquisition opportunities, including opportunities in the
deep water drilling sector, but there can be no assurance as to the timing of
any such acquisitions or that any acquisitions will be made.
The Company believes that its available funds, together with cash
generated from operations and amounts that may be borrowed under the New Loan
Agreement and other potential funding sources will be sufficient to fund its
required capital expenditures, working capital and debt service requirements
for the foreseeable future. Future cash flows, however, are subject to a
number of uncertainties, especially the condition of the oil and gas industry.
Accordingly, there can be no assurance that these resources will be sufficient
to fund the Company's cash requirements. In particular, the potential sources
of funding to complete and equip the MARINE 700 for operations may not be
available at the time or in sufficient amounts to allow the Company to
successfully complete this project.
14
<PAGE> 17
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1996
Revenues
Revenues for the first quarter of 1997 increased $15,511,000 (73%) from
$21,239,000 to $36,750,000 compared to the same period in 1996. The increase
in revenues was the result of three factors: (i) a 56% increase in average day
rates from $21,026 in 1996 to $32,768 in 1997, (ii) an increase in the number
of marketed rigs from 12 in 1996 to 13 in 1997 and (iii) an increase in
utilization of marketed rigs from 94% in 1996 to 100% in 1997. The increases
in utilization and average day rates resulted from increased drilling activity
in the U.S. Gulf of Mexico and from the activation of the MARINE 500 in late
February 1997.
Costs and Expenses
Contract drilling expense for the first quarter of 1997 increased
$2,944,000 (22%) from $13,532,000 to $16,476,000 compared to the same period in
1996. Labor expense increased by $2,300,000 (33%) and was partially offset by
decreases in both employer liability claims and insurance costs. The increase
in labor cost was primarily the result of an increase in the number of domestic
working rigs from 10 in 1996 to 12 in 1997 and due to wage increases.
Depreciation and amortization expense for the first quarter of 1997
increased $884,000 (33%) from $2,697,000 to $3,581,000 compared to the same
period in 1996. The increase resulted primarily from the acquisition of the
MARINE 500, the addition of a top drive and equipment upgrades on the MARINE 15
and MARINE 300, and purchases of drill string and other capital expenditures.
General and administrative expense increased $371,000 (26%) from
$1,410,000 for the first quarter of 1996 to $1,781,000 for the same period in
1997. The increase in the first quarter of 1997 was primarily the result of
increased labor due to additional personnel, an increase in professional
services and an increase in international travel.
Interest Expense
Interest expense for the first quarter of 1997 was $350,000 and
consisted of the following: (i) nonutilization fee of $200,000 based on a 2%
rate on an outstanding balance of $10,000,000, (ii) interest of $115,000 based
on an average rate of 8.1% with an average balance of $10,000,000, (iii) credit
facility fees of $7,000 based on a .25% rate with an average unused balance of
$21,500,000, (iv) agency fee of $50,000, (v) commitment fees of $20,000 based
on a .30% rate with an average unused balance of $100,000,000 and (vi) offset
by capitalized interest of approximately $42,000. Interest expense for the
first quarter of 1996 was $181,000.
Interest Income
Interest income increased $865,000 from $192,000 for the first quarter
of 1996 to $1,057,000 for the same period in 1997. The increase was related
primarily to increased cash balances and, to a lesser extent, higher interest
rates.
Income Taxes
Income tax expense of $5,481,000 for the first quarter of 1997 consisted
of (i) current U.S. federal taxes of $1,039,000, (ii) current foreign taxes of
$73,000, (iii) the effect of tax benefits related to common stock issued
pursuant to the Marine Drilling 1992 Long-Term Incentive Plan $842,000, (iv)
the realization of pre-quasi-reorganization net operating loss carryforwards of
$2,952,000 and (v) deferred U.S. federal income taxes of $575,000.
15
<PAGE> 18
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 that 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:
Exhibits No. Description
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
(Exhibit 27 is being submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q
being submitted to the U.S. Securities and Exchange
Commission.)
(a) Reports on Form 8-K:
No reports on Form 8-K were filed during the first quarter of 1997.
16
<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.
MARINE DRILLING COMPANIES, INC.
(Registrant)
Date: May 14, 1997 By /s/ WILLIAM H. FLORES
------------------------------------
William H. Flores
Executive Vice President
Chief Financial Officer and Director
(Principal Financial Officer)
Date: May 14, 1997 By /s/ JOAN R. SMITH
------------------------------------
Joan R. Smith
Vice President, Controller and
Secretary
(Principal Accounting Officer)
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
15 - Letter regarding unaudited interim financial information
27 - Financial Data Schedule
(Exhibit 27 is being submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q
being submitted to the U.S. Securities and Exchange
Commission.)
</TABLE>
<PAGE> 1
EXHIBIT 15
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
The Board of Directors and Shareholders
Marine Drilling Companies, Inc.:
Re: Registration Statement No. 33-56920 on Form S-8 dated January 11, 1993
No. 33-54909 on Form S-3 dated August 3, 1994
No. 33-61901 on Form S-8 dated August 17, 1995
No. 333-6997 on Form S-3 dated June 27, 1996, as
amended
No. 333-6995 on Form S-4 dated June 27, 1996, as
amended
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 18, 1997, related to our
review of interim financial information. Pursuant to Rule 436(c) under the
Securities Act of 1933, such report is not considered part of a registration
statement prepared or certified by an accountant within the meanings of
Sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
Houston, Texas
April 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 52,938
<SECURITIES> 19,753
<RECEIVABLES> 32,772
<ALLOWANCES> 0
<INVENTORY> 718
<CURRENT-ASSETS> 106,689
<PP&E> 195,091
<DEPRECIATION> 36,788
<TOTAL-ASSETS> 266,365
<CURRENT-LIABILITIES> 14,466
<BONDS> 0
0
0
<COMMON> 514
<OTHER-SE> 235,906
<TOTAL-LIABILITY-AND-EQUITY> 266,365
<SALES> 36,750
<TOTAL-REVENUES> 36,750
<CGS> 16,476
<TOTAL-COSTS> 16,476
<OTHER-EXPENSES> 3,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> 15,659
<INCOME-TAX> 5,481
<INCOME-CONTINUING> 10,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,178
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0
</TABLE>
