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 and Item 1A, "Risk Factors," included in Part II of this report; 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 endedDecember 31, 2019 ; and Item 1A, "Risk Factors" included in Part II of our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 . References to "Diamond Offshore ," "we," "us" or "our" meanDiamond Offshore Drilling, Inc. , aDelaware corporation, and its subsidiaries. We provide contract drilling services to the energy industry around the globe with a fleet of 13 floater rigs (four drillships and 9 semisubmersibles), including two cold-stacked semisubmersible rigs, the Ocean GreatWhite andOcean Valiant . We are in the process of reactivating the Ocean Onyx for a contract with Beach Energy, expected to commence in the first quarter of 2021. The Ocean America andOcean Rover , which were cold stacked in 2015 and 2016, respectively, are being marketed for sale and have been excluded from our current rig fleet. See "- Market Overview." Bankruptcy Filing OnApril 26, 2020 (or the Petition Date),Diamond Offshore Drilling, Inc. (or the Company) and certain of its direct and indirect subsidiaries (which we refer to together with the Company, as the Debtors) filed voluntary petitions (or the Chapter 11 Cases) for relief under chapter 11 (or Chapter 11) of title 11 of the United States Code (or the Bankruptcy Code) in theUnited States Bankruptcy Court for the Southern District of Texas (or theBankruptcy Court ). As of the date of this report, the Debtors have not emerged from bankruptcy and no plan of reorganization or restructuring support agreement has been filed with theBankruptcy Court . Negotiations between the various parties to the Chapter 11 Cases are ongoing.
See Note 2 "Chapter 11 Proceedings" 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 offshore contract drilling market continues to be severely challenged with an oversupply of rigs, in addition to continued depressed commodity prices and the uncertainty around long-lead drilling projects. The COVID-19 outbreak and measures to mitigate the spread of the virus that occurred in most parts of the world contributed to a dramatic fall in demand for oil during the first three quarters of 2020. Economies in parts of the world have now reopened or are in various stages of reopening, while economies in other parts of the globe remain in various stages of lockdown. Some geographic areas are also experiencing a resurgence of COVID-19 cases and are re-implementing strategies to contain the spread of the virus. Partial easing of lockdowns in some areas has resulted in a gradual increase in demand for oil and gas. In addition, commodity prices have risen modestly since the start of the second quarter of 2020, primarily due to an agreement reached by theOrganization of Petroleum Exporting Countries and other oil producing nations on oil production quotas. As of the date of this report, the price for Brent crude oil was in the high$30 -per-barrel range. Despite the modest recovery in commodity price since the first quarter of 2020, some analysts expect downward pressure on oil prices to persist for the remainder of 2020 and could continue for the foreseeable future. Many exploration and production companies, including some of our customers, made significant reductions in their 2020 capital spending programs earlier in the year in response to low commodity prices and uncertain global demand. As a result, some offshore rigs were released early from drilling programs or have had their contracts terminated, while other programs have been paused in response to the need for COVID-19 containment. Given the uncertainty around COVID-19 and other macroeconomic factors, many customers continue to defer capital spending. InApril 2020 , we received a purported notice of termination by a subsidiary of Beach Energy Limited, or Beach, of its contract for the Ocean Onyx. During the third quarter of 2020, we entered into a settlement agreement 27
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and new drilling contract with Beach. Operations under the new contract are expected to commence in the first quarter of 2021.
Global floater contracted utilization was approximately 61% at the end of the third quarter of 2020 with 134 contracted rigs, based on an industry report. There are also 26 floater rigs on order that are scheduled for delivery between 2020 and 2022, only two of which have been contracted for future work. Another 15 floater contract rollovers are expected to occur in the final months of 2020, increasing rig supply and competition in an already depressed market. 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 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$774.0 million to write down four of our semisubmersible rigs to their estimated fair values, including two semisubmersible rigs that are being marketed for sale. If market fundamentals in the offshore oil and gas industry continue to deteriorate or a market recovery is further delayed, we may be required to recognize additional impairment charges in future periods. As of the date of this report, we have two cold-stacked semisubmersible rigs, one of which has not been previously impaired. 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. The contract period is based on the number of stated days for fixed-term contracts or an estimated duration (in days) for contracts based on a fixed number of wells. 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 have approached 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." 28
-------------------------------------------------------------------------------- The following table reflects our contract drilling backlog as ofOctober 1, 2020 (and does not include any contracts signed afterOctober 1, 2020 but prior to the date of this report),January 1, 2020 (the date reported in our Annual Report on Form 10-K/A for the year endedDecember 31, 2019 ), andOctober 1, 2019 (the date reported in our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2019 ) (in millions). October 1, January 1, October 1, 2020 (1) 2020 (1) 2019 (1) Contract Drilling Backlog$ 1,169 $ 1,611 $ 1,835
(1) Contract drilling backlog as of
1, 2019 excludes future commitment amounts totaling approximately
million,
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.
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 2023-2024
Contract Drilling Backlog (2)
139
(1) Represents the three-month period beginning
(2) Contract drilling backlog as of
commitments totaling approximately
approximately
million for the three-year period ending
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.
The following table reflects the percentage of rig days committed by year as ofOctober 1, 2020 . The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet, to total available days (number of rigs, including cold-stacked rigs, multiplied by the number of days in a particular year). For the Years Ending December 31, 2020 (1) 2021 2022 2023-2024 Percentage of Rig Days Committed (2) 57 % 57 % 26 % 5 %
(1) Represents the three-month period beginning
(2) As of
50 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.
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Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows
Restructuring Costs. We expect to incur incremental costs of approximately$25.0 million to$30.0 million during the fourth quarter of 2020 for attorneys, financial advisors and other professionals in connection with the Chapter 11 Cases. COVID-19 Pandemic. The most immediate impact and risks to our business as a result of the COVID-19 outbreak and efforts to mitigate the spread of the virus have been to the safety of our personnel, as well as travel restrictions that have challenged the ability to move personnel, equipment, supplies and service personnel to-and-from our 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, resulting in incremental costs for salaries and other employee-related expenses such as meals and lodging. Our employee travel costs have also increased due to decreased passenger capacity on carriers, requiring additional trips to move personnel. In some cases, we incur freight surcharges to bring equipment and supplies to our rigs. We have also incurred additional costs to deep-clean facilities, for medical personnel and to purchase medical supplies and personal protective equipment. With respect to protecting our crews and, thus, our rig operations, we have adopted COVID-19 testing requirements based on the regions in which our rigs are operating that primarily require testing of all personnel prior to an offshore rotation or travel from theU.S. to an international location. Additionally, for most of our rigs we have implemented the following health protocols once personnel are on board a rig:
• 14-day isolation of our crew prior to reporting for crew change;
• decreased crew change frequency to minimize the frequency of travel and
turnover of crew;
• twice daily temperature checks;
• eliminated large group meetings;
• reduced seating capacity in galley for social distancing;
• eliminated self-servicing of food;
• increased frequency of disinfectant cleaning in communal areas on the
rig; and
• reduced number of personnel in elevators to a maximum of four.
In addition, the Ocean Monarch was previously expected to commence drilling
operations in Myanmar in late March 2020 . As a result of the COVID-19 pandemic
and restrictions put in place by the Republic of the Union of Myanmar , the start
of the drilling contract has been delayed until COVID-19 restrictions are eased
and our customer has agreed to commence the drilling program. As of the date of
this report, the Ocean Monarch is currently warm stacked in Johor Bahru,
Malaysia where it is earning a standby rate intended to cover our daily
operating costs while waiting to commence its contract. We expect the contract
to commence in the fourth quarter of 2020.
During the three- and nine-month periods ended September 30, 2020 , we incurred
incremental costs of approximately $3.6 million and $8.7 million , respectively,
related to the COVID-19 pandemic. As of the date of this report, we expect to
incur similar types of costs during the remainder of 2020 but cannot predict the
future financial impact of our response to the pandemic nor its duration in this
fluid environment. As such, costs may be more than projected, perhaps by a
material amount.
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 North Sea rigs is two-and-one-half years. In
addition, our operating income is negatively impacted by planned downtime for
upgrades, contract preparation and mobilization of rigs; however, in some cases,
we may be compensated for all or a portion of this downtime. During the
remainder of 2020, we expect to spend approximately 120 days for upgrades,
surveys, contract preparation and mobilization of rigs, which includes
approximately 90 days for reactivation and contract preparation activities for
the Ocean Onyx and approximately 30 days for the mobilization of the Ocean
Monarch and Ocean Apex related to their upcoming contracts. We can provide no
assurance as to the exact timing and/or duration of downtime associated with
regulatory inspections, upgrades, contract preparation, rig mobilizations and
other shipyard projects. See " - Contract Drilling Backlog."
Physical Damage and Marine Liability Insurance . We are self-insured for physical
damage to rigs and equipment caused by named windstorms in the U.S. Gulf of
Mexico , as defined by the relevant insurance policy. If a named windstorm in the
U.S. Gulf of Mexico causes significant damage to our rigs or equipment, it could
have a
30
-------------------------------------------------------------------------------- material adverse effect on our financial condition, results of operations and cash flows. Under our current insurance policy, we carry physical damage insurance for certain losses other than those caused by named windstorms in theU.S. Gulf of Mexico for which our deductible for physical damage is$25.0 million per occurrence. We do not typically retain loss-of-hire insurance policies to cover our rigs. 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 theU.S. Gulf of Mexico are$25.0 million for the first occurrence and vary in amounts ranging between$25.0 million and, if aggregate claims exceed certain thresholds, up to$100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year. Our deductibles for other marine liability coverage, including personal injury claims not related to named windstorms in theU.S. Gulf of Mexico , are$5.0 million for the first occurrence and vary in amounts ranging between$5.0 million and, if aggregate claims exceed certain thresholds, up to$100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 1 of our notes to the audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year endedDecember 31, 2019 . 31
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Results of Operations
Our operating results for contract drilling services are dependent on three primary metrics or key performance indicators: revenue-earning, or R-E, days, rig utilization and average daily revenue. The following table presents these three key performance indicators and other comparative data relating to our revenues and operating expenses for the three-month and nine-month periods endedSeptember 30, 2020 and 2019 (in thousands, except days, daily amounts and percentages). Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 REVENUE-EARNING DAYS (1) 675 959 2,290 2,451 UTILIZATION (2) 49 % 65 % 55 % 55 % AVERAGE DAILY REVENUE (3)$ 191,800 $ 252,600 $ 234,000 $ 275,900
REVENUE RELATED TO CONTRACT DRILLING
SERVICES$ 129,345 $ 242,315 $ 535,848 $ 676,284 REVENUE RELATED TO REIMBURSABLE EXPENSES 8,912 11,705 29,782 27,984 TOTAL REVENUES$ 138,257 $ 254,020 $ 565,630 $ 704,268 CONTRACT DRILLING EXPENSE, EXCLUDING DEPRECIATION$ 130,921 $ 201,568 $ 481,376 $ 593,779 REIMBURSABLE EXPENSES$ 8,578 $ 11,423 $ 27,997 $ 27,479 OPERATING LOSS Contract drilling services, net$ (1,576 ) $ 40,747 $ 54,472 $ 82,505 Reimbursable expenses, net 334 282 1,785 505 Depreciation (75,330 ) (88,693 ) (243,208 ) (263,844 ) General and administrative expense (12,781 ) (18,830 ) (44,827 ) (51,436 ) Impairment of assets - - (774,028 ) - Restructuring and separation costs (344 ) - (17,463 ) - Gain (loss) on disposition of assets 479 (6,340 ) 4,132 (1,191 ) Total Operating Loss$ (89,218 ) $ (72,834 ) $ (1,019,137 ) $ (233,461 ) Other income (expense): Interest income 22 1,317 520 5,664 Interest expense, net of amounts capitalized (98 ) (31,098 ) (42,753 ) (92,182 ) Foreign currency transaction loss (661 ) (77 ) (1,458 ) (1,883 ) Reorganization items, net (8,663 ) - (62,640 ) - Other, net 107 82 349 520
Loss before income tax (expense) benefit (98,511 ) (102,610 )
(1,125,119 ) (321,342 ) Income tax (expense) benefit (95 ) 7,482 19,753 38,898 NET LOSS$ (98,606 ) $ (95,128 ) $ (1,105,366 ) $ (282,444 )
(1) A revenue earning, or R-E, 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
respectively).
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(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 third quarter of 2020 were essentially flat compared to the third quarter of 2019, decreasing only$3.5 million . The negative impacts of lower margins from our contract drilling services ($42.3 million ) and reorganization costs ($8.7 million ) during the third quarter of 2020 were partially offset by lower other expenses, net ($47.5 million ), including a decrease in general and administrative costs, depreciation and interest expense. Contract Drilling Revenue. Contract drilling revenue decreased$113.0 million during the third quarter of 2020 compared to the third quarter of 2019, primarily due to the effect of 284 fewer R-E days ($71.9 million ) and lower average daily revenue earned ($41.1 million ). R-E days decreased compared to the third quarter of 2019, primarily due to fewer R-E days related to the cold-stackedOcean Valiant and Ocean GreatWhite (an aggregate 184 fewer R-E days) and incremental downtime attributable to the warm stacking of rigs between contracts (209 fewer R-E days), partially offset by incremental R-E days due to less downtime for planned shipyard projects and mobilization of rigs (83 additional R-E days) and less unplanned downtime for rig repairs and maintenance (26 additional R-E days). The decrease in average daily revenue was primarily related to the Ocean BlackHornet and Ocean BlackLion both starting new contracts in 2020 at significantly lower dayrates than the rigs' previous contracts and the Ocean Monarch, which earned a reduced standby rate throughout the third quarter of 2020 due to COVID-19 related delays. Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation, decreased$70.6 million during the third quarter of 2020 compared to the third quarter of 2019, as a result of lower amortization of previously deferred contract preparation and mobilization costs ($18.3 million ), combined with lower costs for repairs, maintenance and inspections, ($18.0 million ), labor and personnel ($9.7 million ), equipment rentals ($5.2 million ) and other rig operating costs ($9.3 million ), primarily due to the stacking of rigs discussed above. The reduction in rig operating expense during the third quarter of 2020 also reflected a reduction in shorebase and overhead costs as a result of recent cost cutting initiatives ($10.1 million ). Depreciation Expense. Depreciation expense for the third quarter of 2020 decreased$13.4 million compared to the third quarter of 2019. The reduction in depreciation expense primarily related to a lower depreciable asset base in the third quarter of 2020 due to asset impairments recognized during the first quarter of 2020. Interest Expense. Upon filing the Chapter 11 Cases onApril 26, 2020 , we ceased accruing interest expense on our senior unsecured debt and revolving credit agreement, or Credit Agreement, which we entered into onOctober 2, 2018 . As a result, in the third quarter of 2020, we did not record contractual interest expense related to our senior notes ($28.3 million ) and outstanding borrowings under the Credit Agreement ($9.5 million ).
Reorganization Items, net. In the third quarter of 2020, we recognized
Income Tax (Expense) Benefit. We recorded a net income tax expense of$(0.1) million (-0.1% effective tax rate) for the third quarter of 2020, compared to an income tax benefit of$7.5 million (7.3% effective tax rate) for the same quarter of 2019. The decrease in the effective tax rate was primarily due to an increase in valuation allowance for tax attributes that are not likely to be realized and our mix of domestic and international pre-tax profits and losses.
Nine Months Ended
Our net results for the first nine months of 2020 decreased$822.9 million compared to the same period of 2019, primarily due to the impairment of assets in the first quarter of 2020 ($774.0 million ), recognition of reorganization and restructuring costs ($80.1 million ), lower margins earned from our contract drilling services ($28.0 million ) and higher income tax expense ($19.1 million ), partially offset by lower other expenses, net ($78.3 million ), including a decrease in general and administrative costs, depreciation and interest expense. 33 -------------------------------------------------------------------------------- Contract Drilling Revenue. Contract drilling revenue decreased$140.4 million during the first nine months of 2020 compared to the same period of 2019, primarily due to lower average daily revenue earned ($96.0 million ) and 161 fewer R-E days ($44.4 million ). The decrease in average daily revenue was primarily due to both the Ocean BlackHornet and Ocean BlackLion both starting new contracts in 2020 at significantly lower dayrates than the rigs' previous contracts and the Ocean Monarch, which earned a reduced standby rate during the second and third quarters of 2020 due to COVID-19 related delays R-E days decreased, compared to the first nine months of 2019, primarily due to cold stacking the Ocean Valiant and Ocean GreatWhite (an aggregate 392 fewer R-E days) and incremental downtime attributable to the warm stacking of rigs between contracts (237 fewer R-E days), partially offset by incremental R-E days for the Ocean Endeavor (172 additional R-E days), which was reactivated for a new contract that commenced during the second quarter of 2019, less downtime for planned shipyard projects and mobilization of rigs (204 additional R-E days) and less unplanned downtime for rig repairs and maintenance (92 additional R-E days). The decline in revenues during the first nine months of 2020 was partially offset by revenue recognized during the first quarter of 2020 related to the reimbursement of withholding taxes related to one of our rigs inBrazil ($8.8 million ). Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation, decreased$112.4 million during the first nine months of 2020 compared to the same period of 2019, primarily due to lower amortization of previously deferred contract preparation and mobilization costs ($67.6 million ), combined with lower costs for repairs, maintenance and inspections ($27.8 million ), labor and personnel ($5.9 million ) and other rig costs ($11.3 million ), primarily related to the stacking of rigs previously discussed. The overall reduction in rig operating expense during the first nine months of 2020 also reflected a reduction in shorebase and overhead costs related to restructuring efforts ($16.6 million ) in 2020. These cost reductions were partially offset by an increase in other rig moving costs, including fuel ($16.8 million ). Impairment of Assets. During the first quarter of 2020, we evaluated five of our drilling rigs with indicators of impairment at that time and determined that the carrying values of four of the rigs were impaired. As a result, we recognized an aggregate impairment charge of$774.0 million during the first quarter of 2020. See Notes 4 and 7 to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Restructuring and Separation Costs. Prior to the Petition Date, we incurred$7.4 million in legal and other professional advisor fees in connection with the consideration of restructuring alternatives, including the preparation for filing of the Chapter 11 Cases and related matters. Also, during 2020, we initiated a plan to reduce the number of employees in our world-wide organization in an effort to restructure our business operations and lower operating costs. As a result of this initiative, we incurred costs of$10.1 million during the first nine months of 2020, primarily for severance and related costs associated with a reduction in personnel in our corporate offices, warehouse facilities and certain of our international shorebase locations. See Note 11 to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Depreciation Expense. Depreciation expense for the first nine months of 2020 decreased$20.6 million compared to the same period of 2019. The reduction in depreciation expense was primarily due to a lower depreciable asset base in 2020 as a result of asset impairments recognized during the first quarter of 2020. Interest Expense. We ceased accruing interest expense on our senior unsecured debt and amounts outstanding under the Credit Agreement upon filing the Chapter 11 Cases onApril 26, 2020 . As a result, we did not record$48.5 million and$13.9 million of contractual interest expense since that time related to our senior notes and Credit Agreement, respectively. Reorganization Items, net. We recognized$62.6 million in expenses and other net losses directly related to the Chapter 11 Cases in the first nine months of 2020, primarily consisting of the write-off of debt issuance costs ($27.5 million ) and professional fees ($39.3 million ), offset by net gains related to vendor settlements and purchase order cancellations ($4.2 million ). See Note 2 to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Income Tax (Expense) Benefit. We recorded a net income tax benefit of$19.8 million (1.8% effective tax rate) for the first nine months of 2020, compared to an income tax benefit of$38.9 million (12.1% effective tax rate) for the same period of 2019. Income tax benefit for the 2019 period included a net$14.2 million income tax benefit associated with the reduction in our estimate of our transition tax liability pursuant to final regulations issued by the Internal Revenue Service inJune 2019 . OnMarch 27, 2020 , the President ofthe United States signed into law the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act. The CARES Act allows a carryback of net 34 -------------------------------------------------------------------------------- operating losses generated in 2018, 2019 and 2020 to each of the five preceding taxable years. As a result of the carryback, we recognized a tax benefit of$9.7 million in the first quarter of 2020 due to a partial release of a previously recognized valuation allowance and tax rate change.
Liquidity and Capital Resources
Although we anticipate that the Chapter 11 Cases will help address our liquidity concerns, uncertainty remains over theBankruptcy Court's approval of a plan of reorganization, and therefore substantial doubt exists over our ability to continue as a going concern at this time. Financial information in this report has been prepared on the basis that we will continue as a going concern, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business as they come due. Financial information in this report does not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations. Such adjustments could be material. Our long-term liquidity requirements, the adequacy of capital resources and ability to continue as a going concern are difficult to predict at this time and ultimately cannot be determined until a Chapter 11 plan has been confirmed, if at all, by theBankruptcy Court . If our future sources of liquidity are insufficient, we could face substantial liquidity constraints and be unable to continue as a going concern and would likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, or seek other financing alternatives. 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 ofOctober 1, 2020 , our contractual backlog was$1.2 billion , of which$0.1 billion is expected to be realized during the fourth quarter of 2020. Also, during the fourth quarter of 2020, we expect to receive an approximately$25.0 million payment from a customer for a gross margin commitment pursuant to terms of an existing contract if the commitment is not satisfied by the signing of a new contract commencing in 2020. AtSeptember 30, 2020 , we had cash available for current operations of$422.7 million . Sources and Uses of Cash Our operating activities provided net cash of$7.4 million during the first nine months of 2020. Our other sources of cash during the same period were borrowings under the Credit Agreement ($436.0 million ) and proceeds from the sales of the Ocean Confidence ($4.6 million ) andTrinidad bonds ($5.9 million ). See Note 5 to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. We used cash aggregating$162.6 million for capital expenditures during the first nine months of 2020. The principal and interest under the Credit Agreement became immediately due and payable upon filing of the Chapter 11 Cases, which constituted an event of default under the Credit Agreement. Also, as a result of the filing of the Chapter 11 Cases, the commitments under the Credit Agreement were reduced to the amount of borrowings outstanding plus the value of a financial letter of credit issued inJanuary 2020 . See Note 9 "Credit Agreements" to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Cash Flow from Operations. Cash flow from operations for the first nine months of 2020 increased$21.7 million compared to the same period of 2019, primarily due to lower net cash expenditures for contract drilling, shorebase support and general and administrative costs in 2020 compared to 2019 ($46.0 million ) and the receipt of cash income tax refunds, net of payments ($31.2 million ) in the first nine months of 2020 compared to net cash taxes paid ($13.2 million ) during the first nine months of 2019. Sources of operating cash flow during the first nine months of 2020 were partially offset by lower cash receipts for contract drilling services ($50.4 million ), combined with collateral deposits made in support of certain outstanding surety and other bonds and letters of credit ($18.3 million ).
Upgrades and Other Capital Expenditures. As of the date of this report, we
expect cash capital expenditures for the last three months of 2020 to be
approximately
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the Ocean BlackLion and
Other Obligations. As ofSeptember 30, 2020 , the total net unrecognized tax benefits related to uncertain tax positions was$233.5 million . Due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities recognized in these balances, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.
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 certain 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.
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, or the Securities Act 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;
• any potential debt restructuring or refinancing and access to sources of
liquidity;
• our ability to obtain
or other requests made to the
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?
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• 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 or objections 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 andincreased 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;
• business plans or financial condition of our customers, including with
respect to or as a result of the COVID-19 pandemic;
• contractual obligations and future contract negotiations;
• interest rate and foreign exchange risk;
• operations outside the 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; • oil prices; • 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;
• duration and impacts of the COVID-19 pandemic, lockdowns, re-openings and
any other related actions taken by businesses and governments on our
business, operations, supply chain and personnel, financial condition,
results of operations, cash flows and liquidity;
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• expectations regarding our plans and strategies, including plans, effects
and other matters relating to the COVID-19 pandemic;
• 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;
• commencement of a drilling contract for the Ocean Onyx with Beach;
• 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 December 31, 2019 , as supplemented and amended by Item
1A, "Risk Factors" included in Part II of our Quarterly Reports on Form 10-Q for
the quarters ended March 31, 2020 and June 30, 2020 .
The risks and uncertainties referenced above are not exhaustive. Other sections
of this report and our other filings with the Securities and Exchange Commission
include additional factors that could adversely affect our business, results of
operations and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements.
Forward-looking statements included in this report speak only as of the date of
this report. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement to reflect
any change in our expectations or beliefs with regard to the statement or any
change in events, conditions or circumstances on which any forward-looking
statement is based. In addition, in certain places in this report, we may refer
to reports published by third parties that purport to describe trends or
developments in energy production or drilling and exploration activity. While we
believe that these reports are reliable, we have not independently verified the
information included in such reports. We specifically disclaim any
responsibility for the accuracy and completeness of such information and
undertake no obligation to update such information.
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