DIAMOND OFFSHORE DRILLING, INC. The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements (including the notes thereto)
included in Item 1 of Part I of this report, Item 1A, "Risk Factors," included
in Part II of this report and our audited consolidated financial statements
(including the notes thereto), Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 1A, "Risk Factors"
included in our Annual Report on Form 10-K/A for the year ended
We provide contract drilling services to the energy industry around the globe
with a fleet of 15 floater rigs (four drillships and 11 semisubmersibles), of
which two rigs are currently cold-stacked. As of the date of this report, we are
making plans to cold stack an additional two rigs, the Ocean GreatWhite and the
Ocean Onyx. The Ocean Confidence was sold in
Bankruptcy Filing
On
See Note 13 "Subsequent Events" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report and "- Liquidity and Capital Resources."
Market Overview
The protracted industry downturn affecting the offshore contract drilling
industry sustained a further significant set-back, commencing in
Floater utilization, which was approximately 67% at the end of the first quarter, is expected to decrease significantly as some industry analysts report that contracting activity has come to a halt as new rig tenders are deferred or canceled. Additionally, some rigs are being released early from drilling programs or are having their contracts terminated, while other programs have been paused in response to the need for COVID-19 containment. Dayrates are also expected to decrease as customers seek lower rates on any new contracts awarded during these unprecedented times.
In
Global rig attrition is projected by industry analysts to increase as a market recovery is not expected in the near term. During this time, drilling contractors may elect to forego upcoming special surveys of rigs rolling off contract
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with no future work, resulting in the cold stacking or ultimate retirement of a rig. Historically, the longer a drilling rig remains cold stacked, the cost of reactivation increases and the likelihood of reactivation decreases.
During the first quarter of 2020, we recognized asset impairments aggregating
Contract Drilling Backlog
Our contract drilling backlog, as presented below, includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Our utilization rates, which generally approach 92-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including effects of COVID-19 and efforts to mitigate the spread of the virus, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in our contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts. In addition, under certain circumstances, our customers may seek to terminate or renegotiate our contracts, which could adversely affect our reported backlog.
The backlog information presented below does not, nor is it intended to, align with the disclosures related to revenue expected to be recognized in the future related to unsatisfied performance obligations, which are presented in Note 3 "Revenue from Contracts with Customers" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Contract drilling backlog includes only future dayrate revenue as described above, while the disclosure in Note 3 excludes dayrate revenue and reflects expected future revenue for mobilization, demobilization and capital modifications to our rigs, which are related to non-distinct promises within our signed contracts. See "- Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows."
The following table reflects our contract drilling backlog as of
April 1, January 1, April 1,
2020 (1)(2) 2020 (1) 2019 (1)
Contract Drilling Backlog $ 1,393 $ 1,611 $ 1,762 (1) Contract drilling backlog as of
2019 excludes future commitment amounts totaling approximately $100.0
million , $100.0 million and $135.0 million , respectively, payable by a
customer in the form of a guarantee of gross margin to be earned on future
contracts or by direct payment, pursuant to terms of an existing contract.
(2) Contract drilling backlog as of
million of backlog attributable to the upcoming contract for the Ocean
Onyx, which Beach has attempted to terminate. See " - Market Overview."
The following table reflects the amount of revenue related to our contract
drilling backlog by year as of
For the Years Ending December 31,
Total 2020 (1) 2021 2022 2023
Contract Drilling Backlog (2)(3)
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(1) Represents the nine-month period beginning
(2) Contract drilling backlog as of
commitments totaling approximately $100.0 million , which is comprised of
approximately $25.0 million for 2020 and an aggregate of approximately $75.0
million for the three-year period ending December 31, 2023 . These amounts are
payable by a customer in the form of a guarantee of gross margin to be earned
on future contracts or by direct payment at the end of each of the two
respective periods, pursuant to terms of an existing contract.
(3) Contract drilling backlog as of
$32.6 million for the years 2020 and 2021, respectively, of backlog attributable to the upcoming contract for the Ocean Onyx, which Beach has attempted to terminate. See " - Market Overview."
The following table reflects the percentage of rig days committed by year as of
For the Years Ending December 31,
2020 (1) 2021 2022 2023
Rig Days Committed (2) 64 % 45 % 21 % 8 %
(1) Represents the nine-month period beginning
(2) As of
rig days currently known and scheduled for contract preparation, mobilization
of rigs, surveys and extended repair and maintenance projects for the
remainder of 2020 and for the years 2021 and 2022, respectively.
Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows
Restructuring Costs. In
Coronavirus Pandemic. The most immediate impacts and risks to our business as a result of the COVID-19 outbreak and efforts to mitigate the spread of the virus have been the safety of our personnel, as well as travel restrictions that have challenged the ability to move personnel, equipment and services to-and-from drilling rigs. In some instances, we have asked our rig crews to quarantine in-country before offshore rotations, as well as to remain in country after their offshore rotation, which has resulted in incremental costs for salaries and other employee-related expenses. In addition, we have incurred additional costs to deep-clean facilities, purchase medical supplies and personal protective equipment. To date such costs have not been significant, but we cannot predict the future financial impact of our response to the pandemic in this fluid environment.
Regulatory Surveys and Planned Downtime. Our operating income is negatively
impacted when we perform certain regulatory inspections, which we refer to as a
special survey, that are due every five years for most of our rigs. The
inspection interval for our
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named windstorm in the
In addition, we carry marine liability insurance covering certain legal
liabilities, including coverage for certain personal injury claims, and
generally covering liabilities arising out of or relating to pollution and/or
environmental risk. We believe that the policy limit for our marine liability
insurance is within the range that is customary for companies of our size in the
offshore drilling industry and is appropriate for our business. Under these
policies our deductibles for marine liability coverage related to insurable
events arising due to named windstorms in the
Critical Accounting Policies
Our significant accounting policies are discussed in Note 1 of our notes to the
audited consolidated financial statements included in our Annual Report on Form
10-K/A for the year ended
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Results of Operations
Our operating results for contract drilling services are dependent on three primary metrics or key performance indicators: revenue-earning days, rig utilization and average daily revenue. The following table presents these three key performance indicators and other comparative data relating to our revenues and operating expenses for the three-month periods endedMarch 31, 2020 and 2019. Three Months Ended March 31, 2020 2019 (In thousands, except days, daily amounts and percentages) REVENUE-EARNING DAYS (1) 795 734 UTILIZATION (2) 56 % 48 % AVERAGE DAILY REVENUE (3) $ 273,900$ 309,000
REVENUE RELATED TO CONTRACT DRILLING
SERVICES $ 217,866$ 226,697
REVENUE RELATED TO REIMBURSABLE
EXPENSES 11,304 6,845 TOTAL REVENUES $ 229,170$ 233,542
CONTRACT DRILLING EXPENSE, EXCLUDING
DEPRECIATION $ 184,511$ 167,429 REIMBURSABLE EXPENSES $ 11,113 $ 6,743 OPERATING LOSS Contract drilling services, net $ 33,355 $ 59,268 Reimbursable expenses, net 191 102 Depreciation (93,043 ) (86,898 ) General and administrative expense (16,345 ) (17,312 ) Impairment of assets (774,028 ) - Gain (loss) on disposition of assets 3,433 (4,287 ) Total Operating Loss$ (846,437 ) $ (49,127 ) Other income (expense): Interest income 389 2,414 Interest expense, net of amounts capitalized (32,321 ) (29,925 ) Foreign currency transaction gain (loss) 207 (1,085 ) Other, net 323 333 Loss before income tax benefit (877,839 ) (77,390 ) Income tax benefit 15,899 4,062 NET LOSS$ (861,940 ) $ (73,328 )
(1) A revenue-earning day is defined as a 24-hour period during which a rig earns
a dayrate after commencement of operations and excludes mobilization,
demobilization and contract preparation days.
(2) Utilization is calculated as the ratio of total revenue-earning days divided
by the total calendar days in the period for all specified rigs in our fleet
(including two and three cold-stacked rigs at March 31, 2020 and 2019,
respectively).
(3) Average daily revenue is defined as total contract drilling revenue for all
of the rigs in our fleet per revenue-earning day.
Three Months Ended
Net results for the first quarter of 2020 decreased
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expenditures made during 2019. These unfavorable impacts to our net results were
partially offset by a
Operating Results. Contract drilling revenue decreased
Contract drilling expense, excluding depreciation, increased
Impairment of Assets. During the first quarter of 2020, we evaluated five of our
drilling rigs that had indicators of impairment and determined that the carrying
values of four of the rigs were impaired. As a result, we recognized an
aggregate impairment charge of
Gain (Loss) on Disposition of Assets. During the first quarter of 2020, we sold
the Ocean Confidence, a previously impaired semisubmersible rig that was cold
stacked in 2015, for a net pre-tax gain of
Income Tax Benefit. On
We recorded a net income tax benefit of
Liquidity and Capital Resources
In
Although we anticipate that the Chapter 11 Cases will help address our liquidity
concerns, uncertainty remains over the
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We have historically relied on our cash flows from operations and cash reserves
to meet our liquidity needs, which primarily include the servicing of our debt
repayments and interest payments, as well as funding our working capital
requirements and capital expenditures. As of
Sources and Uses of Cash
During the first quarter of 2020, net cash usage for operating activities and
capital expenditures was
Cash Flow from Operations. Cash flow from operations for the first quarter of
2020 decreased
Upgrades and Other Capital Expenditures. As of the date of this report, we
expect cash capital expenditures for the remaining nine months of 2020 to be
approximately
Other Obligations. As of
See Note 9 "Credit Agreements and Credit Ratings" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the recent downgrades of our credit ratings.
Other Commercial Commitments - Letters of Credit
See Note 10 "Commitments and Contingencies" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our other commercial commitments.
Off-Balance Sheet Arrangements
At
New Accounting Pronouncements
See Note 1 "General Information - Recently Adopted Accounting Pronouncements" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of recently issued accounting pronouncements.
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Forward-Looking Statements
We or our representatives may, from time to time, either in this report, in periodic press releases or otherwise, make or incorporate by reference certain written or oral statements that are "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, or the Exchange Act. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words "expect," "intend," "plan," "predict," "anticipate," "estimate," "believe," "should," "could," "would," "may," "might," "will," "will be," "will continue," "will likely result," "project," "forecast," "budget" and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:
• our ability to continue as a going concern;
• covenant compliance and availability of borrowings under our Credit
Agreement or other financings;
• any potential debt restructuring or refinancing and access to sources of
liquidity;
• our ability to obtain Bankruptcy Court approval with respect to motions
or other requests made to the Bankruptcy Court in the Chapter 11 Cases,
including maintaining strategic control as debtors-in-possession?
• our ability to negotiate, develop, confirm and consummate a plan of
reorganization that restructures our debt obligations to address our
liquidity issues and allows emergence from the Chapter 11 Cases;
• the effects of the Chapter 11 Cases on our operations, including our
relationships with employees, regulatory authorities, customers,
suppliers, banks, insurance companies and other third parties, and
agreements;
• the effects of the Chapter 11 Cases on the Company and its subsidiaries
and on the interests of various constituents, including holders of our
common stock and debt instruments?
• the length of time that we will operate under chapter 11 protection and
the continued availability of operating capital during the pendency of
the proceedings?
• risks associated with third-party motions in the Chapter 11 Cases, which
may interfere with our ability to confirm and consummate a plan of
reorganization and restructuring generally?
• increased advisory costs to execute a plan of reorganization and
increased administrative and legal costs related to the Chapter 11 Cases
and other litigation and the inherent risks involved in a bankruptcy
process?
• our ability to access adequate debtor-in-possession financing, if needed,
or use cash collateral?
• the potential adverse effects of the Chapter 11 Cases on our liquidity,
results of operations, or business prospects?
• the impact of the delisting of our common stock by the New York Stock
Exchange on the liquidity and market price of our common stock;
• market conditions and the effect of such conditions on our future results
of operations;
• sources and uses of and requirements for financial resources and sources
of liquidity;
• customer spending programs;
• contractual obligations and future contract negotiations;
• interest rate and foreign exchange risk;
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• operations outsidethe United States ; • business strategy; • growth opportunities; • competitive position, including without limitation, competitive rigs entering the market; • expected financial position; • cash flows and contract backlog; • future amounts payable by a customer in the form of a guarantee of gross margin to be earned on future contracts or by direct payment, pursuant to terms of an existing contract, including the timing of such payments; • idling drilling rigs or reactivating stacked rigs; • outcomes of litigation and legal proceedings; • financing plans; • market outlook; • tax planning and effects of the CARES Act; • changes in tax laws and policies or adverse outcomes resulting from examination of our tax returns; • debt levels and the impact of changes in the credit markets and credit ratings for us and our debt; • budgets for capital and other expenditures; • financial and operational impacts of and duration of the COVID-19 pandemic and any related actions taken by businesses and governments; • timing and duration of required regulatory inspections for our drilling rigs and other planned downtime; • process and timing for acquiring regulatory permits and approvals for our drilling operations; • timing and cost of completion of capital projects; • delivery dates and drilling contracts related to capital projects; • Beach's attempt to terminate its contract for the Ocean Onyx and future backlog for the Ocean Onyx; • plans and objectives of management; • scrapping retired rigs; • asset impairments and impairment evaluations; • assets held for sale; • our internal controls and internal control over financial reporting; • performance of contracts; • compliance with applicable laws; and • availability, limits and adequacy of insurance or indemnification.
These types of statements are based on current expectations about future events
and inherently are subject to a variety of assumptions, risks and uncertainties,
many of which are beyond our control, that could cause actual results to differ
materially from those expected, projected or expressed in forward-looking
statements. These risks and uncertainties include, among others, those described
or referenced under "Risk Factors" in Item 1A in our Annual Report on Form
10-K/A for the year ended
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The risks and uncertainties referenced above are not exhaustive. Other sections
of this report and our other filings with the
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