AND RESULTS OF OPERATIONS
December 31, 2013
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and related notes included elsewhere herein and the Consolidated Financial Statements and notes thereto included in our 2013 Annual Report on Form 10-K, as amended. Our future operating results may be affected by various trends and factors which are beyond our control. These include, among other factors, fluctuations in natural gas and crude oil prices, the loss of one or a number of our largest customers, early termination of drilling contracts and failure to realize backlog drilling revenue, forfeiture of early termination payments under fixed term contracts due to sustained unacceptable performance, unsuccessful collection of receivables, inability to procure key rig components, failure to timely deliver rigs within applicable grace periods, disruption to or cessation of the business of our limited source vendors or fabricators, currency exchange losses, expropriation of assets and other international uncertainties, loss of well control, pollution of offshore waters and reservoir damage, operational risks that are not fully insured against or covered by adequate contractual indemnities, passage of laws or regulations including those limiting hydraulic fracturing, litigation and governmental investigations, failure to comply with the terms of our plea agreement with the
United States Department of Justice, failure to comply with the United States Foreign Corrupt Practices Act, foreign anti-bribery laws and other governmental laws and regulations, a sluggish global economy, changes in general economic and political conditions, adverse weather conditions including hurricanes, rapid or unexpected changes in drilling or other technologies and uncertain business conditions that affect our businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Our risk factors are more fully described in our 2013 Annual Report on Form 10-K, as amended, and elsewhere in this Form 10-Q. With the exception of historical information, the matters discussed in Management's Discussion & Analysis of Financial Condition and Results of Operations include forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", or "continue" or the negative thereof or similar terminology. These forward-looking statements are based on various assumptions. We caution that, while we believe such assumptions to be reasonable and make them in good faith, assumptions about future events and conditions almost always vary from actual results. The differences between assumed facts and actual results can be material. We are including this cautionary statement to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or persons acting on our behalf. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or persons acting on our behalf. Except as required by law, we undertake no duty to update or revise our forward-looking statements based on changes of internal estimates on expectations or otherwise. RESULTS OF OPERATIONS
Three Months Ended
We reported net income of
$173.2 million( $1.59per diluted share) from operating revenues of $889.2 millionfor the first quarter ended December 31, 2013, compared with net income of $159.6 million( $1.48per diluted share) from operating revenues of $844.6 millionfor the first quarter of fiscal year 2013. Net income for the first quarter of fiscal 2014 includes approximately $3.7 million( $0.03per diluted share) of after-tax gains from the sale of assets. Net income for the first quarter of fiscal 2013 includes approximately $5.5 million( $0.05per diluted share) of after-tax gains from the sale of investment securities and approximately $3.4 million( $0.03per diluted share) of after-tax gains from the sale of assets. The following tables summarize operations by reportable operating segment for the three months ended December 31, 2013and 2012. Operating statistics in the tables exclude the effects of offshore platform and international management contracts, and do not include reimbursements of "out-of-pocket" expenses in revenue, expense and margin per day calculations. Per day calculations for international operations also exclude gains and losses from translation of foreign currency transactions. Segment operating income is described in detail in Note 11 to the Consolidated Condensed Financial Statements. 19 --------------------------------------------------------------------------------
Table of Contents Three Months Ended December 31, 2013 2012 (in thousands, except days and per day amounts) U.S. LAND OPERATIONS Revenues $ 731,674 $ 696,030 Direct operating expenses 367,186 361,068 General and administrative expense 9,957 9,321 Depreciation 103,579 91,253 Segment operating income $ 250,952 $ 234,388 Revenue days 23,464 21,743 Average rig revenue per day $ 28,468 $ 28,040 Average rig expense per day $ 12,934 $ 12,634 Average rig margin per day $ 15,534 $ 15,406 Rig utilization 84 % 82 % U.S. Land segment operating income increased to
$251.0 millionfor the first quarter of fiscal 2014 compared to $234.4 millionin the same period of fiscal 2013. Revenues were $731.7 millionand $696.0 millionin the first quarter of fiscal 2014 and 2013, respectively. Included in U.S. land revenues for the three months ended December 31, 2013and 2012 are reimbursements for "out-of-pocket" expenses of $63.7 millionand $86.4 million, respectively. Also included in revenue for the three months ended December 31, 2013and 2012 are early termination fees of $9.9 millionand $0.8 million, respectively. Segment operating income increased in the comparable quarters primarily due to an increase in revenue days. U.S. land rig utilization increased to 84 percent for the first quarter of fiscal 2014 compared to 82 percent for the first quarter of fiscal 2013. U.S. land rig revenue days for the first quarter of fiscal 2014 were 23,464 compared with 21,743 for the same period of fiscal 2013, with an average of 255.0 and 236.3 rigs working during the first quarter of fiscal 2014 and 2013, respectively. At December 31, 2013, 264 out of 309 existing rigs in the U.S. Land segment were contracted. Of the 264 contracted rigs, 160 were under fixed term contracts and 104 were working in the spot market. At January 30, 2014, the number of existing rigs under fixed term contracts in the segment decreased to 155 and the number of rigs working in the spot market increased to 114. Three Months Ended December 31, 2013 2012 (in thousands, except days and per day amounts) OFFSHORE OPERATIONS Revenues $ 59,054 $ 57,718 Direct operating expenses 34,876 37,207 General and administrative expense 2,330 2,235 Depreciation 3,350 3,270 Segment operating income $ 18,498 $ 15,006 Revenue days 736 736 Average rig revenue per day $ 62,306 $ 61,936 Average rig expense per day $ 34,857 $ 36,154 Average rig margin per day $ 27,449 $ 25,782 Rig utilization 89 % 89 % Offshore revenues include reimbursements for "out-of-pocket" expenses of $2.8 millionand $6.3 millionfor the three months ended December 31, 2013and 2012, respectively. Segment operating income increased in the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 primarily due to a higher average rig margin per day.
At the end of both comparative periods, eight of our nine platform rigs were active.
Table of Contents Three Months Ended December 31, 2013 2012 (in thousands, except days and per day amounts) INTERNATIONAL LAND OPERATIONS Revenues $ 95,341 $ 87,267 Direct operating expenses 71,930 68,639 General and administrative expense 1,000 1,039 Depreciation 9,660 8,478 Segment operating income (loss) $ 12,751 $ 9,111 Revenue days 2,156 2,237 Average rig revenue per day $ 38,433 $ 35,511 Average rig expense per day $ 28,091 $ 27,111 Average rig margin per day $ 10,342 $ 8,400 Rig utilization 82 % 85 % International Land segment operating income for the first quarter of fiscal 2014 was
$12.8 millioncompared to $9.1 millionin the same period of fiscal 2013. Included in International land revenues for the three months ended December 31, 2013and 2012 are reimbursements for "out-of-pocket" expenses of $12.5 millionand $7.8 million, respectively. The average revenue per day for the three months ended December 31, 2013compared to the three months ended December 31, 2012increased $2,922primarily due to increases in average dayrates. During the current quarter, an average of 23.7 rigs worked compared to an average of 24.6 rigs in the first quarter of fiscal 2013. RESEARCH AND DEVELOPMENT For the three months ended December 31, 2013and 2012, we incurred $4.3 millionand $3.4 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system. OTHER
General and administrative expenses were
Income from the sale of investment securities was
Income tax expense increased to
$89.8 millionin the first quarter of fiscal 2014 from $86.7 millionin the first quarter of fiscal 2013, primarily due to an increase in operating income. The effective tax rate from continuing operations decreased to 34.1 percent from 35.2 percent for the two comparable quarters.
Interest expense was
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Cash and cash equivalents increased to
$581.4 millionat December 31, 2013from $447.9 millionat September 30, 2013. The following table provides a summary of cash flows: 21
Table of Contents Three Months Ended December 31, 2013 2012 (in thousands) Net cash provided (used) by: Operating activities
$ 304,858 $ 341,922Investing activities (132,730 ) (193,928 ) Financing activities (38,582 ) (2,943 )
Increase in cash and cash equivalents
Operating activities Cash flows from operating activities were approximately
$304.9 millionfor the three months ended December 31, 2013compared to approximately $341.9 millionfor the same period ended December 31, 2012. The decrease in cash provided from operating activities is primarily due to an increase of $8.8 millionin accounts receivable during the three months ended December 31, 2013compared to a decrease of $40.3 millionin accounts receivable during the three months ended December 31, 2012. Investing activities Capital expenditures during the three months ended December 31, 2013were $140.6 millioncompared to $219.4 millionduring the three months ended December 31, 2012. Financing activities In June 2013, we announced a dividend increase to $0.50per share of common stock. The increase resulted in dividends paid of $53.9 millionduring the quarter ended December 31, 2013compared to $0.07per share of common stock or $7.4 millionpaid during the quarter ended December 31, 2012. On December 3, 2013, we announced a dividend increase to $0.625per share of common stock which will increase dividends paid in the quarter ending March 31, 2014. Other Liquidity Funds generated by operating activities, available cash and cash equivalents, and our existing credit facility represent our significant sources of liquidity. Given current market conditions and general expectations, we believe these sources of liquidity will be sufficient to sustain operations and finance estimated capital expenditures, dividends and debt obligations during fiscal 2014. There can be no assurance that we will continue to generate cash flows at current levels or obtain additional financing. Our indebtedness totaled $195.0 millionat December 31, 2013, $115.0 millionof which is due during fiscal 2014. For additional information regarding debt agreements, refer to Note 8 of the Consolidated Condensed Financial Statements. Backlog Our contract drilling backlog, being the expected future revenue from executed contracts with original terms in excess of one year, as of December 31, 2013and September 30, 2013was $3.3 billionand $2.9 billion, respectively. The increase in backlog at December 31, 2013from September 30, 2013is primarily due to the expected revenue from new multi-year contracts announced since October 1, 2013. Approximately 62.3 percent of the December 31, 2013backlog is not reasonably expected to be filled in fiscal 2014. Term contracts customarily provide for termination at the election of the customer with an "early termination payment" to be paid to us if a contract is terminated prior to the expiration of the fixed term. However, under certain limited circumstances, such as destruction of a drilling rig, bankruptcy, sustained unacceptable performance by us, or delivery of a rig beyond certain grace and/or liquidated damage periods, no early termination payment would be paid to us. In addition, a portion of the backlog represents term contracts for new rigs that will be constructed in the future. We obtain certain key rig components from a single or limited number of vendors or fabricators. Certain of these vendors or fabricators are thinly capitalized independent companies located on the Texas Gulf Coast. Therefore, disruptions in rig component deliveries may occur. Accordingly, the actual amount of revenue earned may vary from the backlog reported. See the risk factors under "Item 1A. Risk Factors" of our Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission, regarding fixed term contract risk, operational risks, including weather, and vendors that are limited in number and thinly capitalized. The following table sets forth the total backlog by reportable segment as of December 31, 2013and September 30, 2013, and the percentage of the December 31, 2013backlog not reasonably expected to be filled in fiscal 2014: 22 -------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, September 30, Percentage Not Reasonably Reportable Segment 2013 2013 Expected to be Filled in Fiscal 2014 (in billions) U.S. Land $ 2.8 $ 2.4 62.5 % Offshore 0.1 0.1 64.4 % International Land 0.4 0.4 59.4 % $ 3.3 $ 2.9 Capital Resources Since September 30, 2013, we have announced that we had secured multi-year term contracts to build and operate 35 new FlexRigs with nine customers in the U.S. We expect our new FlexRig construction cadence to continue at a rate of approximately two per month through the end of the second fiscal quarter and to increase to approximately three per month beginning in April through the end of the fiscal year. During the three months ended December 31, 2013, we completed and placed into service seven new FlexRigs. Six additional new FlexRigs under fixed term contract were completed by the end of January 2014. In addition, we have an agreement to build a new 3,000 horsepower AC drive rig which is scheduled to begin operations in an international location in the spring of 2014. Like those completed in prior fiscal periods, each of the 35 new FlexRigs is committed to work for an exploration and production company under a fixed term contract, performing drilling services on a daywork contract basis. Our capital spending estimate for fiscal 2014 has been increased to $950 milliongiven the increasing demand for FlexRigs. However, the actual spending level may vary depending primarily on actual maintenance capital requirements and on the timing of procurement related to our ongoing newbuild efforts. Capital expenditures were $140.6 millionand $219.4 millionfor the first three months of fiscal 2014 and 2013, respectively.
There were no other significant changes in our financial position since
Material commitments as reported in our 2013 Annual Report on Form 10-K, as amended, has not changed significantly at
CRITICAL ACCOUNTING POLICIES Our accounting policies that are critical or the most important to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2013 Annual Report on Form 10-K, as amended. There have been no material changes in these critical accounting policies.
RECENTLY ISSUED ACCOUNTING STANDARDS
October 1, 2013, we adopted ASU 2013-02, Other Comprehensive Income. ASU No. 2013-02 amended ASC 220, Comprehensive Income, and superseded and replaced ASU 2011-05, Presentation of Comprehensive Income, and ASU 2011-12, Comprehensive Income. The standard did not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance does require an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The adoption had no impact on the amount of OCI reported in the Consolidated Financial Statements. 23 --------------------------------------------------------------------------------
Table of Contents PART I. FINANCIAL INFORMATION
December 31, 2013