ITEM 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion should be read in conjunction with our unaudited consolidated financial statements (including the notes thereto)
included elsewhere in this report and our audited consolidated financial statements and the notes thereto, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 1A,
Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2015. References to Diamond Offshore, we, us or our mean Diamond Offshore Drilling, Inc., a
Delaware corporation, and its subsidiaries.
We are a leader in offshore drilling, providing contract drilling services to the energy
industry around the globe with a fleet of 30 offshore drilling rigs, which includes four jack-up rigs that we are marketing for sale. Our fleet consists of 21 semisubmersibles, including the
Ocean GreatWhite
, which is under construction, five
jack-up rigs and four dynamically positioned drillships. We expect our harsh environment, ultra-deepwater semisubmersible rig, the
Ocean GreatWhite
, to be delivered in the second half of 2016.
Market Overview
Market fundamentals in
the oil and gas industry have continued to deteriorate in 2016. Oil prices, which had fallen to a 12-year low below $30 per barrel in January, have rebounded slightly but continue to exhibit day-to-day volatility, due to multiple factors, including
fluctuations in the current and expected level of global oil inventories and the lack of a supply response by the Organization of Petroleum Exporting Countries (OPEC). These factors, as well as other geopolitical and economic issues, combined with
significant operating losses incurred by some independent and national oil companies and exploration and production companies during 2015, have resulted in significantly reduced capital spending plans for 2016 and possibly beyond, as operators
struggle to stay cash neutral in the current oil price environment. There have been very few rig tenders thus far in 2016, primarily limited to short-term or well-to-well work not commencing until 2017 or later.
Since 2014, approximately 50 floater rigs have been retired and others have been cold stacked, slightly abating the current oversupply of
drilling rigs. The number of available rigs continues to grow as contracted rigs come off contract and newly-built rigs are delivered. Competition for the limited number of drilling jobs continues to be intense. In some cases, dayrates have been
negotiated at near break-even levels to provide for the recovery of operating costs for rigs that would otherwise be uncontracted or cold stacked. Many industry analysts have predicted that the offshore contract drilling market may remain depressed
with further declines in dayrates and utilization likely in 2016 and 2017.
21
As a result of the depressed market conditions and continued pessimistic outlook for the near
term, certain of our customers, as well as those of our competitors, have attempted to renegotiate or terminate existing drilling contracts. Such renegotiations could include requests to lower the contract dayrate, lowering of a dayrate in exchange
for additional contract term, shortening the term on one contracted rig in exchange for additional term on another rig, early termination of a contract in exchange for a lump sum margin payout and many other possibilities. In addition to the
potential for renegotiations, some of our drilling contracts permit the customer to terminate the contract early after specified notice periods, usually resulting in a contractually specified termination amount, which may not fully compensate us for
the loss of the contract. Particularly during depressed market conditions, the early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations
and cash flows. When a customer terminates our contract prior to the contracts scheduled expiration, our contract backlog is also adversely impacted.
Our results of operations and cash flows for the quarter ended March 31, 2016 have been negatively impacted by depressed market
conditions in the offshore drilling industry. We currently expect that these adverse market conditions will continue for the foreseeable future. The continuation of these conditions for an extended period could result in more of our rigs being
without contracts and/or cold stacked or scrapped and could further materially and adversely affect our financial condition, results of operations and cash flows. When we cold stack or elect to scrap a rig, we evaluate the rig for impairment. During
2015, we recognized an aggregate impairment loss of $860.4 million to write down 17 of our drilling rigs to their estimated recoverable amounts. During the first quarter of 2016, we evaluated ten of our drilling rigs with indications that their
carrying amounts may not be recoverable and determined that no additional rigs were impaired at this time. See Results of Operations
Overview Three Months Ended March 31, 2016 and 2015 Impairment of
Assets
and Note 2 to our unaudited consolidated financial statements included in Item 1 of Part I this report.
On
April 28, 2016, our subsidiarys agent in Mexico received a letter from PEMEX Exploración y Producción, or PEMEX, purporting to exercise its contractual right to terminate its drilling contract on the
Ocean
Scepter
with 30 days advance notice. We are in discussions with PEMEX regarding the matter. As of May 2, 2016, 15 rigs in our fleet were cold stacked, including four jack-up rigs that are currently being marketed for sale. See
Contract Drilling Backlog for future commitments of our rigs during 2016 through 2020.
Although these general market
conditions impact all segments of the offshore drilling market, the following discussion addresses market conditions within segments of the floater market.
Floater Markets
Ultra-Deepwater and Deepwater Floaters.
Globally, the ultra-deepwater and deepwater floater markets continue to be depressed. Diminished
or nonexistent demand, combined with an oversupply of rigs has caused floater dayrates to decline significantly. Industry analysts expect offshore drillers to continue to scrap older, lower specification rigs; however, newer and higher specification
rigs have also been impacted by the recycling trend.
In an effort to manage the oversupply of rigs and potentially avoid the cost of cold
stacking newly-built rigs, which, in the case of dynamically-positioned rigs, can be significant, several drilling contractors have exercised options to delay the delivery of rigs by the shipyard or have exercised their right to cancel orders due to
the late delivery of rigs. As of the date of this report, industry data indicates that there are approximately 55 competitive, or non-owner-operated, newbuild floaters on order, including 16 rigs scheduled for delivery in 2016 of which 12 units are
not yet contracted for future work. An additional 39 rigs are currently scheduled to be delivered between 2017 and 2021, over half of which are not yet contracted for future work. Industry analysts predict that delivery dates may shift further as
newbuild owners negotiate with their respective shipyards.
Mid-Water Floaters.
While conditions in the mid-water market vary
slightly by region, mid-water rigs have been adversely impacted by (i) lower demand, (ii) declining dayrates, (iii) increased regulatory requirements,
22
including more stringent design requirements for well control equipment, which could significantly increase the capital needed to comply with design requirements that would permit such rigs to
work in the U.S. Gulf of Mexico, or GOM, (iv) the challenges experienced by lower specification units in this segment as a result of more complex customer specifications and (v) the intensified competition resulting from the migration of
some deepwater and ultra-deepwater units to compete against mid-water units. To date, the mid-water market has seen the highest number of cold-stacked and scrapped rigs. Since 2012, we have sold 12 of our mid-water rigs for scrap. As market
conditions remain challenging, we expect higher-specification rigs to take the place of lower-specification units, where possible, leading to additional lower-specification rigs being cold stacked or ultimately scrapped.
GOM Floaters
. On April 14, 2016, the Bureau of Safety and Environmental Enforcement, or BSEE, issued its final well control
regulations, nearly six years after the Macondo well blowout in the GOM. This final rule addresses the full range of systems and equipment associated with well control operations, focusing on requirements for blowout preventers, or BOPs, well
design, well control casing, cementing, real-time monitoring and subsea containment. The regulations combine prescriptive and performance-based measures to cultivate a greater culture of safety for both oil and gas companies and offshore rig
operators that minimizes risk. Key features of the well control regulations include requirements for BOPs, double shear rams, third-party reviews of equipment, real-time monitoring data, safe drilling margins, centralizers, inspections and other
reforms related to well design and control, casing, cementing and subsea containment. Most of these requirements will become effective three months after publication of the final rule in the Federal Register; however, several requirements have more
extended timeframes for compliance.
The issuance of these rules could result in the future retirement of older, less capable rigs, for
which compliance with the new requirements is not physically or economically feasible. Additionally, some analysts predict that the new rules will drive the continued preference for modern floaters. See Important Factors That May Impact
Our Operating Results, Financial Condition or Cash Flows.
23
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of April 1, 2016 (based on contract information known at that time),
February 16, 2016 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2015), and April 20, 2015 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
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 and adding one-half of any
potential rig performance bonuses. 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. Utilization rates, which generally approach 92-98% during contracted periods, can be adversely impacted by downtime due
to various operating factors including, but not limited to, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2016
|
|
|
February 16,
2016
|
|
|
April 20,
2015
|
|
|
|
(In thousands)
|
|
Contract Drilling Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
(1)
|
|
$
|
4,137,000
|
|
|
$
|
4,415,000
|
|
|
$
|
5,167,000
|
|
Deepwater
|
|
|
327,000
|
|
|
|
375,000
|
|
|
|
617,000
|
|
Mid-Water
|
|
|
307,000
|
|
|
|
356,000
|
|
|
|
438,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Floaters
|
|
|
4,771,000
|
|
|
|
5,146,000
|
|
|
|
6,222,000
|
|
|
|
|
|
Jack-ups
(2)
|
|
|
7,000
|
|
|
|
49,000
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,778,000
|
|
|
$
|
5,195,000
|
|
|
$
|
6,271,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Contract drilling backlog as of April 1, 2016 for our ultra-deepwater floaters includes $641.0 million for the years 2016 to 2019 attributable to future work for the semisubmersible
Ocean GreatWhite
,
which is under construction.
|
(2)
|
On April 28, 2016, our subsidiarys agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the
Ocean Scepter
with 30
days advance notice. We are in discussions with PEMEX regarding the matter.
|
The following table reflects the amount
of our contract drilling backlog by year as of April 1, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
Total
|
|
|
2016
(1)
|
|
|
2017
|
|
|
2018
|
|
|
2019 - 2020
|
|
|
|
(In thousands)
|
|
Contract Drilling Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
(2)
|
|
$
|
4,137,000
|
|
|
$
|
794,000
|
|
|
$
|
1,201,000
|
|
|
$
|
1,142,000
|
|
|
$
|
1,000,000
|
|
Deepwater
|
|
|
327,000
|
|
|
|
191,000
|
|
|
|
136,000
|
|
|
|
|
|
|
|
|
|
Mid-Water
|
|
|
307,000
|
|
|
|
171,000
|
|
|
|
136,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Floaters
|
|
|
4,771,000
|
|
|
|
1,156,000
|
|
|
|
1,473,000
|
|
|
|
1,142,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Jack-ups
(3)
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,778,000
|
|
|
$
|
1,163,000
|
|
|
$
|
1,473,000
|
|
|
$
|
1,142,000
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
(1)
|
Represents the nine-month period beginning April 1, 2016.
|
(2)
|
Contract drilling backlog as of April 1, 2016 for our ultra-deepwater floaters includes $54.0 million for the year 2016, $214.0 million for each of the years 2017 and 2018, and $159.0 million for the year 2019
attributable to future work for the
Ocean GreatWhite
, which is under construction.
|
(3)
|
On April 28, 2016, our subsidiarys agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the
Ocean Scepter
with 30 days
advance notice. We are in discussions with PEMEX regarding the matter.
|
The following table reflects the percentage of rig
days committed by year as of April 1, 2016. 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 multiplied by the number of days in a particular year). Total available days have been calculated based on the expected final commissioning date for the
Ocean GreatWhite
, which is under construction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
2016
(1)
|
|
|
2017
|
|
|
2018
|
|
|
2019 - 2020
|
|
Rig Days Committed
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
|
47
|
%
|
|
|
58
|
%
|
|
|
57
|
%
|
|
|
26
|
%
|
Deepwater
|
|
|
24
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
Mid-Water
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
All Floaters
|
|
|
32
|
%
|
|
|
34
|
%
|
|
|
25
|
%
|
|
|
11
|
%
|
Jack-ups
(3)
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the nine-month period beginning April 1, 2016.
|
(2)
|
As of April 1, 2016, includes approximately 285 currently known, scheduled shipyard days for rig commissioning, contract preparation, surveys and extended maintenance projects, as well as rig mobilization days, for
the year 2016.
|
(3)
|
On April 28, 2016, our subsidiarys agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the
Ocean Scepter
with 30
days advance notice. We are in discussions with PEMEX regarding the matter.
|
Important Factors That May Impact Our Operating
Results, Financial Condition or Cash Flows
Regulatory Surveys, Planned Downtime and Regulatory Compliance.
Our operating income
is negatively impacted when we perform certain regulatory inspections, which we refer to as a 5-year survey, or special survey, that are due every five years for each of our rigs. During the remainder of 2016, we expect to spend an additional
approximately 285 days for the mobilization of rigs and contract acceptance testing, including days associated with mobilization and acceptance testing for the
Ocean GreatWhite
(approximately 90 days), which is under construction and expected
to be delivered in the second half of 2016 and rig modifications and acceptance testing for the
Ocean BlackRhino
, which is scheduled to begin operating under a new contract in January 2017 (approximately 105 days). We expect the
Ocean
Endeavor
to be unavailable through mid-2016 (approximately 55 days) as it demobilizes out of the Black Sea. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig
mobilizations and other shipyard projects. See
Contract Drilling Backlog
.
In April 2016, BSEE issued its final
well control regulations, which address the full range of systems and equipment associated with well control operations, focusing on requirements for blowout preventers, well design, well control casing, cementing, real-time monitoring and subsea
containment. We are currently assessing the final rules and have not yet determined the costs to comply with the additional requirements to enable our drilling rigs to be eligible to operate in U.S. waters.
25
Physical Damage and Marine Liability Insurance.
We are self-insured for physical damage to
rigs and equipment caused by named windstorms in the GOM. If a named windstorm in the GOM causes significant damage to our rigs or equipment, it could have a material adverse effect on our financial condition, results of operations and cash flows.
Under our current insurance policy, which renewed effective May 1, 2016, we carry physical damage insurance for certain losses other than those caused by named windstorms in the GOM 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, under our current insurance
policy, which renewed effective May 1, 2016, 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. Our
deductibles for marine liability coverage related to insurable events arising due to named windstorms in the U.S. Gulf of Mexico is $25.0 million for the first occurrence, with no aggregate deductible, 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 the U.S. Gulf of Mexico, are $10.0 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.
Construction and Capital Upgrade Projects.
We capitalize interest cost for the construction and upgrade of qualifying assets in
accordance with accounting principles generally accepted in the U.S., or GAAP. The period of interest capitalization covers the duration of the activities required to make the asset ready for its intended use, and the capitalization period ends when
the asset is substantially complete and ready for its intended use, which is expected to continue after delivery of the rigs from the shipyard and until the user acceptance phase of each project is completed. During the first quarter of 2016, we
capitalized interest of $3.3 million related to the construction of the
Ocean GreatWhite
and will continue capitalizing interest on this project until its completion, which we expect to occur in the second half of 2016.
Critical Accounting Policies
Our
significant accounting policies are discussed in Note 1 of our notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. There were no material changes to these policies
during the three months ended March 31, 2016.
Results of Operations
Although we perform contract drilling services with different types of drilling rigs and in many geographic locations, there is a similarity of
economic characteristics among all our divisions and locations, including the nature of services provided and the type of customers for our services. We believe that the combination of our drilling rigs into one reportable segment is the appropriate
aggregation in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of our results of operations, we provide greater detail with respect to the types of rigs in our fleet to
enhance the readers understanding of our financial condition, changes in financial condition and results of operations.
26
Key performance indicators by equipment type are listed below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
REVENUE EARNING DAYS
(1)
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
|
612
|
|
|
|
506
|
|
Deepwater
|
|
|
177
|
|
|
|
285
|
|
Mid-Water
|
|
|
181
|
|
|
|
663
|
|
Jack-ups
|
|
|
91
|
|
|
|
358
|
|
|
|
|
UTILIZATION
(2)
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
|
61
|
%
|
|
|
51
|
%
|
Deepwater
|
|
|
28
|
%
|
|
|
45
|
%
|
Mid-Water
|
|
|
25
|
%
|
|
|
49
|
%
|
Jack-ups
|
|
|
18
|
%
|
|
|
66
|
%
|
|
|
|
AVERAGE DAILY REVENUE
(3)
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
$
|
533,000
|
|
|
$
|
496,800
|
|
Deepwater
|
|
|
334,500
|
|
|
|
486,500
|
|
Mid-Water
|
|
|
263,100
|
|
|
|
265,900
|
|
Jack-ups
|
|
|
118,400
|
|
|
|
92,400
|
|
(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 cold-stacked rigs, but excluding rigs under
construction). As of March 31, 2016, our cold-stacked rigs included three ultra-deepwater semisubmersibles, four deepwater semisubmersible, five mid-water semisubmersibles and four jack-up rigs.
|
(3)
|
Average daily revenue is defined as total contract drilling revenue for all of the specified rigs in our fleet per revenue earning day.
|
27
Comparative data relating to our revenues and operating expenses by equipment type are listed
below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
CONTRACT DRILLING REVENUE
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
$
|
325,961
|
|
|
$
|
251,396
|
|
Deepwater
|
|
|
59,117
|
|
|
|
138,770
|
|
Mid-Water
|
|
|
47,672
|
|
|
|
176,357
|
|
|
|
|
|
|
|
|
|
|
Total Floaters
|
|
|
432,750
|
|
|
|
566,523
|
|
Jack-ups
|
|
|
10,773
|
|
|
|
33,054
|
|
|
|
|
|
|
|
|
|
|
Total Contract Drilling Revenue
|
|
$
|
443,523
|
|
|
$
|
599,577
|
|
|
|
|
|
|
|
|
|
|
REVENUES RELATED TO REIMBURSABLE EXPENSES
|
|
$
|
27,020
|
|
|
$
|
20,479
|
|
|
|
|
CONTRACT DRILLING EXPENSE
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
$
|
123,736
|
|
|
$
|
154,539
|
|
Deepwater
|
|
|
47,509
|
|
|
|
63,675
|
|
Mid-Water
|
|
|
23,884
|
|
|
|
99,320
|
|
|
|
|
|
|
|
|
|
|
Total Floaters
|
|
|
195,129
|
|
|
|
317,534
|
|
Jack-ups
|
|
|
6,055
|
|
|
|
21,570
|
|
Other
|
|
|
11,657
|
|
|
|
11,554
|
|
|
|
|
|
|
|
|
|
|
Total Contract Drilling Expense
|
|
$
|
212,841
|
|
|
$
|
350,658
|
|
|
|
|
|
|
|
|
|
|
REIMBURSABLE EXPENSES
|
|
$
|
26,791
|
|
|
$
|
20,092
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Floaters:
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
|
|
$
|
202,225
|
|
|
$
|
96,857
|
|
Deepwater
|
|
|
11,608
|
|
|
|
75,095
|
|
Mid-Water
|
|
|
23,788
|
|
|
|
77,037
|
|
|
|
|
|
|
|
|
|
|
Total Floaters
|
|
|
237,621
|
|
|
|
248,989
|
|
Jack-ups
|
|
|
4,718
|
|
|
|
11,484
|
|
Other
|
|
|
(11,657
|
)
|
|
|
(11,554
|
)
|
Reimbursable expenses, net
|
|
|
229
|
|
|
|
387
|
|
Depreciation
|
|
|
(104,240
|
)
|
|
|
(137,299
|
)
|
General and administrative expense
|
|
|
(15,398
|
)
|
|
|
(17,452
|
)
|
Gain on disposition of assets
|
|
|
296
|
|
|
|
611
|
|
Impairment of assets
|
|
|
|
|
|
|
(358,528
|
)
|
Restructuring and separation costs
|
|
|
|
|
|
|
(6,168
|
)
|
|
|
|
|
|
|
|
|
|
Total Operating Income (Loss)
|
|
$
|
111,569
|
|
|
$
|
(269,530
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
173
|
|
|
|
583
|
|
Interest expense, net of amounts capitalized
|
|
|
(25,516
|
)
|
|
|
(23,982
|
)
|
Foreign currency transaction (loss) gain
|
|
|
(3,608
|
)
|
|
|
5,590
|
|
Other, net
|
|
|
578
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
83,196
|
|
|
|
(287,118
|
)
|
Income tax benefit
|
|
|
4,229
|
|
|
|
31,409
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
87,425
|
|
|
$
|
(255,709
|
)
|
|
|
|
|
|
|
|
|
|
28
Overview
Three Months Ended March 31, 2016 and 2015
Operating Income.
Operating income for the first quarter of 2016 increased $381.1 million compared to the same period of 2015, primarily
due to the absence of a $358.5 million impairment loss recognized in the first quarter of 2015 combined with the favorable impact of lower depreciation expense. Depreciation expense for the first quarter of 2016 decreased $33.0 million primarily due
to a lower depreciable asset base in 2016, compared to the first quarter of 2015, as a result of asset impairments taken in 2015.
Contract drilling revenue decreased $156.1 million, or 26%, during the first quarter of 2016, compared to the same quarter of 2015, primarily
as a result of an aggregate of 857 fewer revenue earning days for our deepwater, mid-water and jack-up fleets, reflecting continued low demand for contract drilling services in those markets, partially offset by the favorable impact of a 106-day
increase in revenue earning days for our ultra-deepwater fleet, which included the operation of three newbuild drillships that commenced drilling operations subsequent to the first quarter of 2015 and an increase in average daily revenue for our
ultra-deepwater fleet, primarily due to the inclusion of $40.0 million in demobilization revenue for the
Ocean Endeavor
.
Total
contract drilling expense decreased $137.8 million, or 39%, during the first quarter of 2016, compared to the same quarter of 2015, reflecting lower overall operating costs, primarily for labor and personnel ($64.6 million), repairs and maintenance
($22.8 million), freight ($6.5 million), inspections ($5.3 million) and an aggregate decrease in other rig operating and overhead costs ($38.5 million). The reduction in contract drilling expense during the first quarter of 2016 reflected reduced
costs associated with rigs idled, cold stacked or retired subsequent to the first quarter of 2015, as well as cost control initiatives implemented during 2015.
Impairment of Assets
. During the first quarter of 2015, we evaluated all of our mid-water semisubmersibles, as well as one drillship,
for impairment. Based on this evaluation, we determined that the carrying value of our 7,875-foot water depth rated drillship, the
Ocean Clipper
, and seven of mid-water floaters, was impaired. We recorded an aggregate impairment loss of
$358.5 million in the first quarter of 2015. During the first quarter of 2016, we evaluated ten of our drilling rigs with indications that their carrying amounts may not be recoverable. Based on this evaluation, we determined that the carrying
values of these rigs were not impaired. See Note 2 to our unaudited consolidated financial statements included in Item 1 of Part I of this report.
Restructuring and Separation Costs.
During the first quarter of 2015, in response to the continued decline in the offshore drilling
market, our management approved and initiated a reduction in workforce at our onshore bases and corporate facilities, which resulted in the recognition of $6.2 million in restructuring and other employee separation related costs.
Income Tax Expense.
Our effective tax rate for the three months ended March 31, 2016 was (5.1) %, compared to a 10.9%
effective tax rate for the three months ended March 31, 2015. The effective tax rate in the 2016 period was lower than in the same period of 2015 primarily due to the mix of our domestic and international pre-tax earnings and losses, including
asset impairments taken in various jurisdictions in 2015.
Contract Drilling Revenue and Expense by Equipment Type
Three Months Ended March 31, 2016 and 2015
Ultra-Deepwater Floaters.
Revenue generated by our ultra-deepwater floaters increased $74.6 million during the first quarter of 2016,
compared to the same quarter of 2015, primarily as a result of 106 incremental revenue earning days ($52.4 million) and higher average daily revenue earned ($22.2 million). Revenue earning days for the first quarter of 2016 increased, compared to
the first quarter of 2015, primarily due to 204 incremental revenue earning days for our newbuild drillships and 91 incremental operating days for the
Ocean Monarch
, which was warm stacked during the first quarter of 2015. The increase in
revenue earning days was
29
partially offset by an aggregate of 99 fewer revenue earning days for the
Ocean Endeavor
and
Ocean Rover
, both of which completed contracts in the first quarter of 2016, and an
aggregate 98 fewer revenue earning days for the cold-stacked
Ocean Baroness
and the
Ocean Clipper
, which was sold in November 2015. Average daily revenue increased during the first quarter of 2016, compared to the first quarter of
2015, primarily due to the inclusion of $40.0 million in demobilization revenue for the
Ocean Endeavor
, which completed its contract in the Black Sea in January 2016.
Contract drilling expense for our ultra-deepwater floaters decreased $30.8 million during the first quarter of 2016, compared to the same
period of 2015. Incremental contract drilling expense for our three additional drillships operating in the GOM ($36.9 million) was more than offset by lower operating costs for our other ultra-deepwater floaters, including labor and personnel ($30.9
million), maintenance and inspections ($20.4 million), freight ($4.1 million) and other rig operating and overhead costs ($12.3 million) due to reduced costs for our cold-stacked rigs and the retired
Ocean Clipper
, as well as cost reduction
initiatives implemented in 2015.
Deepwater Floaters.
Revenue generated by our deepwater floaters decreased $79.7 million in the
first quarter of 2016, compared to the same quarter in 2015, primarily due to 108 fewer revenue earning days. The decrease in revenue earning days for the first quarter of 2016 resulted primarily from additional downtime associated with the cold
stacking and idling of rigs that had operated during the first quarter of 2015 (285 fewer days), partially offset by incremental revenue earning days for the
Ocean Victory
and
Ocean Valiant
, neither of which were under contract during
the first quarter of 2015 (177 incremental days).
Contract drilling expense incurred by our deepwater floaters decreased $16.2 million
during the first quarter of 2016, compared to the same period of 2015, primarily due to a net reduction in labor and personnel costs ($7.4 million), maintenance, repairs and other related costs ($3.9 million), shorebase support and overhead ($3.6
million) and other costs ($1.3 million) as a result of the cold stacking or idling of rigs.
Mid-Water Floaters.
Revenue generated
by our mid-water floaters during the first quarter of 2016 decreased $128.7 million compared to the same quarter in 2015, primarily due to 482 fewer revenue earning days ($128.2 million), reflecting a significant reduction in demand in the mid-water
drilling market. Comparing the periods, only two of our mid-water floaters operated during both periods. Subsequent to the first quarter of 2015, we have sold nine mid-water floaters, reducing our mid-water fleet to five drilling rigs, three of
which are currently cold stacked.
Contract drilling expense for our mid-water floaters decreased $75.4 million in the first quarter of
2016, compared to the prior year quarter, primarily due to reduced operating costs for our non-operating rigs.
Jack-ups.
Contract
drilling revenue for our jack-up fleet decreased $22.3 million during the first quarter of 2016, compared to the prior year quarter, primarily due to the cold stacking of three rigs, all of which were operating under contract in the first quarter of
2015. On April 28, 2016, our subsidiarys agent in Mexico received a letter from PEMEX purporting to exercise its contractual right to terminate its drilling contract on the
Ocean Scepter
, our sole working jack-up rig, with 30
days advance notice. We are in discussions with PEMEX regarding the matter.
Liquidity and Capital Resources
We have historically relied principally on our cash flows from operations and cash reserves to meet liquidity needs and fund our cash
requirements. However, we have also utilized short-term borrowings under our $1.5 billion syndicated revolving credit agreement, or Credit Agreement, and issued commercial paper to meet our short-term liquidity needs. See Credit
Agreement and Commercial Paper.
Based on our cash available for current operations and contractual backlog of $4.8 billion as of
April 1, 2016, of which $1.2 billion is expected to be realized during the remainder of 2016, we believe our 2016 capital
30
expenditures, including the final installment due on the
Ocean GreatWhite
, will be funded from our cash and cash equivalents, future operating cash flows and borrowings under our Credit
Agreement, as needed. See Cash Flow, Capital Expenditures and Contractual Obligations Contractual Cash Obligations Rig Construction
Certain of our international rigs are owned and operated, directly or indirectly, by Diamond Foreign Asset Company, or DFAC, and, as a result
of our intention to indefinitely reinvest the earnings of DFAC and its foreign subsidiaries to finance our foreign activities, we do not expect such earnings to be available for distribution to our stockholders or to finance our domestic activities.
To the extent available, we expect to utilize the operating cash flows generated by and cash reserves of DFAC and the operating cash flows available to and cash reserves of Diamond Offshore Drilling, Inc., or DODI, to meet each entitys
respective working capital requirements and capital commitments.
At March 31, 2016 and December 31, 2015, we had cash available
for current operations as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cash and equivalents
|
|
$
|
128,928
|
|
|
$
|
119,028
|
|
Marketable securities
|
|
|
5,067
|
|
|
|
11,518
|
|
|
|
|
|
|
|
|
|
|
Total cash available for current operations
|
|
$
|
133,995
|
|
|
$
|
130,546
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of our cash flows has been invested in the enhancement of our drilling fleet. We
determine the amount of cash required to meet our capital commitments by evaluating our rig construction obligations, the need to upgrade rigs to meet specific customer requirements and our ongoing rig equipment enhancement/replacement programs. We
also make periodic assessments of our capital spending programs based on current and expected industry conditions and make adjustments thereto if required. See Cash Flow, Capital Expenditures and Contractual Obligations Capital
Expenditures.
We pay dividends at the discretion of our Board of Directors, or Board. Any determination to declare a dividend, as
well as the amount of any dividend that may be declared, will be based on the Boards consideration of our financial position, earnings, earnings outlook, capital spending plans, outlook on current and future market conditions and business
needs and other factors that our Board of Directors considers relevant at that time. On February 8, 2016, we announced that we were discontinuing our quarterly regular cash dividend. As a result, we did not pay a dividend during the three-month
period ended March 31, 2016. During the three-month period ended March 31, 2015, we paid regular cash dividends totaling $17.1 million.
Depending on market and other conditions, we may, from time to time, purchase shares of our common stock in the open market or otherwise. We
did not purchase any shares of our outstanding common stock during the three-month periods ended March 31, 2016 and 2015.
During the
three-month period ended March 31, 2016, our primary source of cash, was an aggregate $241.3 million generated by operating activities and $113.3 million from the disposition of assets, including $105.0 million from the completion of two sale
and leaseback transactions with respect to certain equipment on two of our drillships and $8.0 million in proceeds from the sale of one marketed-for-sale jack-up rig. See Cash Flow, Capital Expenditures and Contractual Obligations
Contractual Cash Obligations Pressure Control by the Hour. Cash usage during the same period was primarily for capital expenditures of $58.1 million and repayment of commercial paper notes totaling $286.6 million.
During the three-month period ended March 31, 2015, our primary source of cash, was an aggregate $160.6 million generated by operating
activities and $4.8 million from the disposition of assets. Cash usage during the
31
same period was primarily $197.0 million towards the construction of new rigs and our ongoing rig equipment enhancement/replacement program and $17.1 million for the payment of dividends.
We may, from time to time, issue debt or equity securities, or a combination thereof, to finance capital expenditures, the acquisition of
assets and businesses or for general corporate purposes. Our ability to access the capital markets by issuing debt or equity securities will be dependent on our results of operations, our current financial condition, current credit ratings, current
market conditions and other factors beyond our control.
Cash Flow, Capital Expenditures and Contractual Obligations
Our cash flow from operations and capital expenditures for the three-month periods ended March 31, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cash flow from operations
|
|
$
|
241,330
|
|
|
$
|
160,566
|
|
|
|
|
Cash capital expenditures:
|
|
|
|
|
|
|
|
|
Drillship construction
|
|
$
|
|
|
|
$
|
31,796
|
|
Major upgrade of deepwater floaters
|
|
|
|
|
|
|
33,774
|
|
Construction of ultra-deepwater floater
|
|
|
19,295
|
|
|
|
7,892
|
|
Ocean Patriot
enhancement project
|
|
|
|
|
|
|
719
|
|
Ocean Confidence
service-life extension project
|
|
|
|
|
|
|
43,078
|
|
Rig equipment and replacement programs
|
|
|
38,819
|
|
|
|
79,773
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
58,114
|
|
|
$
|
197,032
|
|
|
|
|
|
|
|
|
|
|
Cash Flow.
Cash flow from operations increased approximately $80.8 million during the first three
months of 2016, compared to the first three months of 2015, primarily due to a net decrease in cash payments for contract drilling and general and administrative expenses, including personnel-related, repairs and maintenance, and other rig operating
costs ($188.2 million), partially offset by lower cash receipts for contract drilling services ($108.6 million). The decline in both cash receipts and cash payments related to the performance of contract drilling services reflects a reduction in
contract drilling activity during the three month period ended March 31, 2016 as well as our continuing efforts to control costs.
Capital Expenditures.
We currently expect total capital expenditures for the remainder of 2016 to aggregate approximately $620.0
million, of which we expect to spend approximately $510.0 million towards construction of the
Ocean GreatWhite
and the remainder on our ongoing capital maintenance and replacement programs. As of March 31, 2016, we had incurred capital
expenditures of $57.3 million, including accrued expenditures. See Contractual Cash Obligations Rig Construction.
Contractual Cash Obligations Rig Construction
. As of the date of this report, we have one rig, the
Ocean GreatWhite
,
under construction in Ulsan, South Korea, for which we are obligated under a construction agreement with Hyundai Heavy Industries Co., Ltd, or HHI. Construction of the
Ocean GreatWhite
continues with delivery expected in the second half of
2016. The estimated total project cost, including shipyard costs, capital spares, commissioning, project management and shipyard supervision, is $764.0 million, of which $256.2 million has been incurred as of March 31, 2016. The final
installment due HHI under the construction agreement of $439.9 million is due upon delivery of the rig.
Contractual Cash Obligations
Pressure Control by the Hour.
During March 2016, we executed two sale and leaseback transactions with respect to the
Ocean BlackHawk
and
Ocean BlackHornet
. Future commitments under the operating leases and contractual
services agreements for the
Ocean BlackHawk
and
Ocean
32
BlackHornet
are estimated to aggregate approximately $33.0 million per annum or an aggregate $327.0 million over the term of the agreements. We expect to complete the remaining sale and
leaseback transactions for the
Ocean BlackLio
n and
Ocean BlackRhino
in the second and fourth quarters of 2016, respectively. See Note 10 to our unaudited consolidated financial statements included in Item 1 of Part I of this
report.
We had no other purchase obligations for major rig upgrades or any other significant obligations at March 31, 2016, except
for those related to our direct rig operations, which arise during the normal course of business.
Other Obligations.
As of
March 31, 2016, the total unrecognized tax benefits related to uncertain tax positions was $97.6 million. In addition, we have recorded a liability, as of March 31, 2016, for potential penalties and interest of $41.9 million and $3.2
million, respectively. 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.
Credit Agreement and Commercial Paper
All short-term borrowings were repaid during the first quarter of 2016. In February 2016, as a result of a downgrade in our short-term credit
rating, we canceled our commercial paper program due to our inability to access the commercial paper market in the foreseeable future. See Credit Ratings.
As of March 31, 2016, there were no loans or letters of credit outstanding under our Credit Agreement, and we were in compliance with all
covenants thereunder. As of April 28, 2016, we had $1.5 billion available under our Credit Agreement to provide short-term liquidity for our payment obligations.
Credit Ratings
In February 2016,
Moodys Investors Service downgraded our senior unsecured credit rating to Ba2 from Baa2, with a stable outlook, and also downgraded our short-term credit rating to sub-prime. Our current corporate credit rating for Standard &
Poors Ratings Services is BBB+ and our short-term credit rating is A2. Market conditions and other factors, many of which are outside of our control, could cause our credit ratings to be lowered. A downgrade in our credit ratings could
adversely impact our cost of issuing additional debt and the amount of additional debt that we could issue, and could further restrict our access to capital markets and our ability to raise additional debt or rollover existing maturities. As a
consequence, we may not be able to issue additional debt in amounts and/or with terms that we consider to be reasonable. One or more of these occurrences could limit our ability to pursue other business opportunities.
Other Commercial Commitments Letters of Credit
We were contingently liable as of March 31, 2016 in the amount of $69.0 million under certain performance, bid, security, tax, supersedeas
and customs bonds and letters of credit. Agreements relating to approximately $63.9 million of performance, security, tax, supersedeas and customs bonds can require collateral at any time. As of March 31, 2016, we had not been required to make
any collateral deposits with respect to these agreements. The remaining agreements cannot require collateral except in events of default. Banks have issued letters of credit on our behalf securing certain of these bonds. The table below provides a
list of these obligations in U.S. dollar equivalents and their time to expiration.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
|
Total
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance bonds
|
|
$
|
51,357
|
|
|
$
|
5,122
|
|
|
$
|
16,748
|
|
|
$
|
10,362
|
|
|
$
|
19,125
|
|
Supersedeas bond
|
|
|
9,189
|
|
|
|
9,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax bond
|
|
|
5,795
|
|
|
|
5,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,646
|
|
|
|
2,302
|
|
|
|
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
68,987
|
|
|
$
|
22,408
|
|
|
$
|
16,748
|
|
|
$
|
10,706
|
|
|
$
|
19,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Off-Balance Sheet Arrangements
At March 31, 2016 and December 31, 2015, we had no off-balance sheet debt or other off-balance sheet arrangements.
New Accounting Pronouncements
See Note 1
General Information to our unaudited 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, 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. 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:
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market conditions and the effect of such conditions on our future results of operations;
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sources and uses of and requirements for financial resources and sources of liquidity;
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interest rate and foreign exchange risk;
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contractual obligations and future contract negotiations;
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competitive position, including without limitation, competitive rigs entering the market;
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expected financial position;
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cash flows and contract backlog;
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declaration and payment of regular or special dividends;
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debt levels and the impact of changes in the credit markets and credit ratings for our debt;
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timing and duration of required regulatory inspections for our drilling rigs;
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timing and cost of completion of rig upgrades, construction projects and other capital projects;
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delivery dates and drilling contracts related to rig conversion or upgrade projects, construction projects, other capital projects or rig acquisitions;
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idling drilling rigs or reactivating stacked rigs;
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scrapping retired rigs;
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asset impairments and impairment evaluations;
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outcomes of legal proceedings;
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purchases of our securities;
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compliance with applicable laws; and
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availability, limits and adequacy of insurance or indemnification.
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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.
The risks and uncertainties referenced above are not exhaustive. Other sections of this report and our other filings with the SEC 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. We do so for the convenience of our investors and potential investors and in an effort to provide information available in the market intended to lead to a
better understanding of the market environment in which we operate. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.