SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
------------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
Commission File Number 1-8097
ENSCO INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232579
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 Fountain Place
1445 Ross Avenue, Dallas Texas 75202 - 2792
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 922-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [ X ] NO [ ]
There were 70,840,317 shares of Common Stock, $.10 par value, of the
registrant outstanding as of November 11, 1996.
ENSCO INTERNATIONAL INCORPORATED
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Review Report of Independent Accountants 3
Consolidated Balance Sheet
September 30, 1996 and December 31, 1995 4
Consolidated Statement of Income
Three Months Ended September 30, 1996 and 1995 5
Consolidated Statement of Income
Nine Months Ended September 30, 1996 and 1995 6
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ENSCO International Incorporated
We have reviewed the accompanying consolidated balance sheet of ENSCO
International Incorporated as of September 30, 1996 and the related
consolidated statements of income and of cash flows for the three and nine
month periods ended September 30, 1996 and 1995. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of income and of cash flows for the year
then ended (not presented herein), and in our report dated February 2, 1996
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet information as of December 31, 1995, is fairly
stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Dallas, Texas
November 6, 1996
3
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(Unaudited)
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................... $ 89,521 $ 77,064
Short-term investments........................ - 5,000
Accounts and notes receivable, net............ 95,516 60,796
Prepaid expenses and other.................... 14,515 22,893
Total current assets.................... 199,552 165,753
PROPERTY AND EQUIPMENT, AT COST................. 1,181,500 818,266
Less accumulated depreciation................. 234,524 185,334
Property and equipment, net............. 946,976 632,932
OTHER ASSETS
Goodwill...................................... 96,258 7,252
Other......................................... 7,584 15,514
Total other assets......................... 103,842 22,766
$1,250,370 $821,451
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................. $ 5,508 $ 8,936
Accrued liabilities........................... 64,517 45,820
Current maturities of long-term debt.......... 34,378 32,052
Total current liabilities............... 104,403 86,808
LONG-TERM DEBT.................................. 253,524 159,201
DEFERRED INCOME TAXES........................... 50,737 26,800
OTHER LIABILITIES............................... 26,994 17,393
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 125.0 million
shares authorized, 77.1 million and 66.9
million shares issued....................... 7,708 6,689
Additional paid-in capital.................... 834,700 615,644
Retained earnings (deficit)................... 39,885 (23,598)
Restricted stock (unearned compensation)...... (5,219) (5,263)
Cumulative translation adjustment............. (1,086) (1,086)
Treasury stock at cost, 6.3 million shares.... (61,276) (61,137)
Total stockholders' equity ............. 814,712 531,249
$1,250,370 $821,451
The accompanying notes are an integral part of these financial statements.
4
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
-------- --------
(In thousands, except
per share data)
OPERATING REVENUES........................... $134,588 $ 71,793
OPERATING EXPENSES
Operating costs............................ 64,801 40,479
Depreciation and amortization.............. 23,653 14,702
General and administrative................. 2,768 2,209
91,222 57,390
OPERATING INCOME............................. 43,366 14,403
OTHER INCOME (EXPENSE)
Interest income............................ 1,051 986
Interest expense........................... (6,319) (3,912)
Other, net................................. 2,803 874
(2,465) (2,052)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST......... 40,901 12,351
Provision for income taxes
Current income taxes..................... 1,937 -
Deferred income taxes.................... 11,042 1,242
12,979 1,242
Minority interest.......................... 710 508
INCOME FROM CONTINUING OPERATIONS............ 27,212 10,601
Income from discontinued operations........ - 5,679
NET INCOME .................................. $ 27,212 $ 16,280
EARNINGS PER SHARE
Continuing operations...................... $ .38 $ .18
Discontinued operations.................... - .09
$ .38 $ .27
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 70,779 60,476
The accompanying notes are an integral part of these financial statements.
5
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
-------- --------
(In thousands, except
per share data)
OPERATING REVENUES........................... $316,383 $195,348
OPERATING EXPENSES
Operating costs............................ 157,552 112,738
Depreciation and amortization.............. 57,907 42,555
General and administrative................. 7,933 6,830
223,392 162,123
OPERATING INCOME............................. 92,991 33,225
OTHER INCOME (EXPENSE)
Interest income............................ 3,385 4,787
Interest expense........................... (14,755) (12,407)
Other, net................................. 10,525 2,217
(845) (5,403)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST......... 92,146 27,822
Provision for (benefit from) income taxes
Current income taxes..................... 2,898 (846)
Deferred income taxes.................... 23,697 2,272
26,595 1,426
Minority interest.......................... 2,068 1,706
INCOME FROM CONTINUING OPERATIONS............ 63,483 24,690
Income from discontinued operations........ - 6,296
NET INCOME .................................. $ 63,483 $ 30,986
EARNINGS PER SHARE
Continuing operations...................... $ .98 $ .41
Discontinued operations.................... - .10
$ .98 $ .51
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 64,781 60,505
The accompanying notes are an integral part of these financial statements.
6
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net income........................................ $ 63,483 $ 30,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 57,907 42,555
Deferred income tax provision................. 23,697 2,272
Amortization of other assets.................. 2,729 2,556
Gain on sale of discontinued operations....... - (5,161)
Net cash provided by discontinued operations.. - 135
Other......................................... (195) (2,260)
Changes in operating assets and liabilities:
Increase in accounts receivable............. (12,519) (16,146)
Decrease in prepaid expenses and other...... 9,615 5,450
Increase (decrease) in accounts payable..... 1,546 (1,606)
Increase in accrued liabilities............. 1,868 2,465
Net cash provided by operating
activities........................... 148,131 61,246
INVESTING ACTIVITIES
Additions to property and equipment............... (106,288) (103,193)
Sale of short-term investments.................... 5,000 5,869
Net cash acquired in Dual acquisition............. 8,529 -
Other............................................. 6,479 (5,654)
Net cash used by investing activities......... (86,280) (102,978)
FINANCING ACTIVITIES
Proceeds from long-term borrowings................ 45,000 24,043
Reduction of long-term borrowings................. (77,061) (33,233)
Pre-acquisition purchase of Dual debt............. (18,112) -
Repurchase of common stock........................ - (7,210)
Other............................................. 779 734
Net cash used by financing activities........... (49,394) (15,666)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 12,457 (57,398)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 77,064 147,851
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 89,521 $ 90,453
The accompanying notes are an integral part of these financial statements.
7
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
ENSCO International Incorporated (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission and
in accordance with generally accepted accounting principles and, in the
opinion of management, reflect all adjustments (which consist of normal
recurring adjustments) which are necessary for a fair statement of the
financial position and results of operations for the interim periods
presented.
On June 12, 1996, the Company acquired DUAL DRILLING COMPANY ("Dual"). See
"Note 2 - Acquisition" below. The Company's consolidated financial
statements include the results of Dual from the June 12, 1996 acquisition
date.
The financial data for the three and nine month periods ended September 30,
1996 included herein have been subjected to a limited review by Price
Waterhouse LLP, the registrant's independent accountants. The accompanying
review report of independent accountants is not a report within the meaning
of Sections 7 and 11 of the Securities Act of 1933 and the independent
accountant's liability under Section 11 does not extend to it.
Results of operations for the three and nine month periods ended September
30, 1996 are not necessarily indicative of results of operations which will
be realized for the year ending December 31, 1996. It is recommended that
these statements be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's Annual Report on Form 10-K.
NOTE 2 - ACQUISITION
On June 12, 1996, the Company acquired Dual pursuant to an Agreement and
Plan of Merger among the Company, DDC Acquisition Company, a wholly owned
subsidiary of the Company, and Dual (the "Merger Agreement") approved by
Dual stockholders on that date. Under the terms of the Merger Agreement,
each share of Dual common stock was immediately converted into the right to
receive 0.625 shares of the Company's common stock. The Company issued
approximately 10.1 million shares of its common stock to Dual stockholders
in connection with the acquisition of Dual.
The Company accounted for the acquisition of Dual as a purchase. The
purchase price allocation has been based on preliminary estimates of fair
value and is subject to adjustment as additional information becomes
available and is evaluated. The primary areas subject to further purchase
price adjustment are reserves associated with insurance related matters and
taxes.
The acquired Dual operations consisted of a fleet of 20 offshore drilling
rigs, including 10 jackup rigs and 10 platform rigs. Five of Dual's jackup
8
rigs are presently located in the Gulf of Mexico, four jackup rigs are
located offshore Indonesia, India and Qatar and the remaining jackup rig is
now in a Malaysia shipyard for modifications and enhancements. Of the 10
platform rigs operated by Dual, seven are currently located in the Gulf of
Mexico and one, which is not owned but managed by Dual, is located off the
coast of China. The remaining two platform rigs, formerly located off the
coast of California, have been retired.
The following unaudited pro forma information shows the consolidated
results of operations for the nine months ended September 30, 1996 and 1995
based upon adjustments to the historical financial statements of the
Company and the historical financial statements of Dual to give effect to
the acquisition by the Company as if such acquisition had occurred
January 1, 1995 (in thousands, except per share data):
1996 1995
-------- --------
Operating revenues $369,925 $262,058
Operating income $ 94,665 $ 29,062
Income from continuing operations $ 60,578 $ 11,977
Net income $ 60,578 $ 18,273
Earnings per share $ 0.86 $ 0.26
The pro forma consolidated results of operations are not necessarily
indicative of the actual results that would have occurred had the
acquisition occurred on January 1, 1995, or of results that may occur in
the future.
NOTE 3 - OTHER INCOME
In February 1991, a subsidiary of the Company filed an action against
TransAmerican Natural Gas Corporation and related subsidiaries and
affiliates ("TransAmerican") seeking damages for breach of contract. On
April 5, 1996, the U.S. District court for the Southern District of Texas,
Houston Division, entered a judgment against TransAmerican. As a result of
the judgment, on April 18, 1996, the subsidiary of the Company entered into
a settlement agreement with TransAmerican. Under the terms of the
settlement agreement, the subsidiary of the Company received approximately
$7.3 million. In the second quarter of 1996, the Company recorded a gain
of $6.4 million under the caption "Other, net" with a corresponding
increase in deferred income tax expense of $2.2 million for an after tax
gain of $4.2 million.
The Company sold substantially all of the assets of its technical services
business in September 1995 as discussed in "Note 8 - Discontinued
Operations". In early July 1996, the Company converted its convertible
promissory note received from the purchaser ("Purchaser") into common stock
of the Purchaser. The Company sold the Purchaser's common stock for $5.4
million and recorded a gain in the third quarter associated with the sale
of approximately $2.9 million under the caption "Other, net" with a
corresponding increase in deferred income tax expense of $1.1 million for
an after tax gain of $1.8 million.
9
NOTE 4 - LONG-TERM DEBT
On June 13, 1996, the Company amended its $130.0 million revolving credit
facility with a group of international banks, increasing availability under
the revolving credit facility ("Facility") to $150.0 million. On the same
date, the Company borrowed an additional $45.0 million under the Facility,
increasing outstanding borrowings under the Facility to $111.0 million.
Proceeds from the additional $45.0 million of borrowings under the Facility
were used to refinance approximately $41.8 million of Dual's bank debt.
Availability under the Facility is reduced by $7.0 million on a semi-annual
basis commencing in October 1996, with the remaining outstanding balance
due in October 2001. The Facility continues to be collateralized by the
majority of the Company's jackup rigs, including certain of the jackup rigs
acquired in the acquisition of Dual. The covenants under the Facility are
similar to the covenants that existed under the original revolving credit
facility and the interest rate continues to be tied to London InterBank
Offered Rates. As of September 30, 1996, the interest rate on the Facility
was 7.05%.
At the June 12, 1996 acquisition date, Dual had outstanding $100.0 million
(face amount) of 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8%
Notes"). In July 1996, $5.0 million (face amount) of the 9 7/8% Notes were
redeemed pursuant to an offer by Dual to purchase the 9 7/8% Notes
following a change in control. Additionally, as of September 30, 1996, the
Company had purchased $23.2 million (face amount) of the 9 7/8% Notes on
the open market. The Company's balance sheet at September 30, 1996
reflects long-term debt net of the $5.0 million redemption and the $23.2
million (face amount) of 9 7/8% Notes purchased by the Company.
In September 1995, the Company amended and restated a $100.0 million loan
arrangement with a group of international banks. The amended and restated
facility was structured as a $130.0 million revolving credit facility, of
which $66.0 million was drawn as of September 30, 1995. The interest rate
on the facility was 7.15% as of September 30, 1995. The amended and
restated facility was recently amended on June 13, 1996 as discussed above.
NOTE 5 - PROVISION FOR INCOME TAXES
The current income tax provisions for the three and nine months ended
September 30, 1996 are primarily for United States alternative minimum
taxes and the Company's operations in Venezuela, India, Indonesia, Qatar,
Mexico and the Netherlands. The deferred income tax provisions for the
three and nine months ended September 30, 1996 relate to the Company's
operations in the U.S., the United Kingdom and Venezuela. The income tax
provisions for the three and nine months ended September 30, 1995 primarily
include U.S. alternative minimum taxes, current and deferred taxes related
to the Company's operations in Venezuela and deferred taxes related to the
Company's operations in the United Kingdom. No provision for regular U.S.
federal income taxes has been recorded for the three and nine months ended
September 30, 1996 and 1995 due to the utilization of net operating loss
carryforwards to offset taxes currently payable.
At September 30, 1996, the Company had regular and alternative minimum tax
net operating loss carryforwards of approximately $214.8 million and $129.9
10
million, respectively, and investment tax credit and alternative minimum
tax credit carryforwards of approximately $360,000 and $1.5 million,
respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In mid-January 1996, one of the Company's jackup rigs located in the Gulf
of Mexico experienced damage as it was preparing to jack up on a new
location. The jackup rig was mobilized to a shipyard where it is currently
undergoing repairs and is expected to be available for work in late 1996.
The Company is fully insured for damage to and salvage operations related
to the jackup rig and the Company expects that all such costs incurred will
be recoverable from its insurance coverage. The Company, through October
31, 1996, has incurred approximately $17.0 million of charges related to
the rig damage. As of September 30, 1996, the Company had a receivable
recorded from its insurance carrier of approximately $5.5 million in
connection with costs incurred for salvage operations and repairs related
to the rig.
NOTE 7 - CHANGE IN ESTIMATED RIG LIVES
In connection with the Company's rig upgrade program in 1995, the remaining
useful life of certain rigs for which major enhancements were performed was
extended to twelve years from the time each respective rig left the
shipyard to better reflect their remaining economic lives. The effect of
this change in estimate was to increase net income for the three and nine
months ended September 30, 1995 by $365,000, or $.01 per share.
NOTE 8 - DISCONTINUED OPERATIONS
Effective September 30, 1995 the Company exited the technical services
business through the sale of substantially all of the assets of its wholly
owned subsidiary, ENSCO Technology Company. The purchase price consisted
of $11.8 million in cash, an interest-bearing promissory note for $3.6
million, an interest-bearing convertible promissory note for $2.5 million
and the assumption of $1.9 million of liabilities. The convertible
promissory note was convertible, at the Company's option, into equity of
the purchaser. The $3.6 million promissory note was paid in July 1996.
The $2.5 million promissory note was converted into common stock of the
Purchaser and sold for $5.4 million in July 1996. See "Note 3 - Other
Income."
Included in the 1995 Income from Discontinued Operations is a gain on the
sale discussed above of $5.2 million and income from operations for the
three and nine months ended September 30, 1995 of $500,000 and $1.1
million, respectively. Revenues from the technical services operations for
the three and nine months ended September 30, 1995 were $5.2 million and
$13.4 million, respectively.
NOTE 9 - SUBSEQUENT EVENTS
The Company entered into an agreement in October, 1996 to purchase a jackup
drilling rig currently located in Southeast Asia. The transaction was
completed in early November.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
ENSCO International Incorporated (the "Company") provides offshore contract
drilling and marine transportation services to the oil and gas industry.
The Company's contract drilling operations are presently conducted in the
Gulf of Mexico, the North Sea, Venezuela and Asia. The marine
transportation services provided by the Company are currently conducted
solely in the Gulf of Mexico.
The improvement in industry activity for offshore drilling rigs and Gulf of
Mexico marine vessels began in early 1995 and has continued throughout
1996. The increased activity levels in 1996 have resulted in demand
sufficient to absorb almost all of the rigs that are in working condition
and being actively marketed in the major offshore oil and gas markets
throughout the world and for Gulf of Mexico marine vessels that are in
working condition and being actively marketed.
Management believes that the currently strong level of offshore drilling
activity in the Gulf of Mexico is sustainable for the remainder of 1996
unless there is a significant and unexpected deterioration in natural gas
prices. In particular, demand for cantilever jackup rigs, which is the
Company's main focus, is expected to remain strong due to the increased
level of development activity which requires cantilevered drilling over
existing production platforms. Activity levels for the Company's marine
transportation vessels generally correspond with activity levels
experienced for the Company's Gulf of Mexico rigs.
In the North Sea, industry activity levels have increased in 1996 with full
utilization of all actively marketed jackup rigs as compared to near full
utilization in the latter part of 1995. During 1996, reduced industry
activity levels in the British sector of the North Sea (due to lower
natural gas prices in the United Kingdom) have been offset by higher
activity levels in other sectors of the North Sea, particularly Holland.
In Asia, during the first nine months of 1996, demand for offshore drilling
rigs has remained stable while the supply of actively marketed offshore
drilling rigs has continued to fall. Management anticipates that activity
levels for offshore drilling rigs in Asia should remain fairly stable for
the remainder of 1996 unless there is a significant deterioration in oil
prices.
The Company's barge drilling rigs in Venezuela generally operate under
long-term contracts with Lagoven S.A. ("Lagoven"), a subsidiary of the
Venezuela national oil company. As a result, their activity levels are not
as dependent on oil prices.
12
Offshore rig and marine vessel industry utilization for the three and six
months ended September 30, 1996 and 1995 are summarized below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
INDUSTRY WIDE AVERAGES *
- ------------------------
Offshore Rigs
U.S. Gulf of Mexico:
Jackup Rigs:
Rigs Under Contract 124 113 120 104
Total Rigs Available 136 140 137 141
% Utilization 91% 81% 88% 74%
Platform Rigs:
Rigs Under Contract 19 13 19 17
Total Rigs Available 26 24 26 33
% Utilization 73% 54% 73% 52%
Worldwide:
Jackup Rigs:
Rigs Under Contract 351 332 344 321
Total Rigs Available 383 386 384 388
% Utilization 92% 86% 90% 83%
Platform Rigs:
Rigs Under Contract 113 99 110 137
Total Rigs Available 124 113 120 157
% Utilization 91% 88% 92% 87%
Marine Vessels
U.S. Gulf of Mexico:
Vessels Under Contract 258 254 261 245
Total Vessels Available 274 277 278 277
% Utilization 94% 92% 94% 88%
* Industry utilization based on data published by OFFSHORE DATA SERVICES,
INC.
13
RESULTS OF OPERATIONS
On June 12, 1996, the Company acquired DUAL DRILLING COMPANY ("Dual") in a
purchase acquisition. The Company's consolidated financial statements
include the results of Dual from the June 12, 1996 acquisition date. The
acquired Dual operations consisted of a fleet of 20 offshore drilling rigs,
including 10 jackup rigs and 10 platform rigs. Five of Dual's jackup rigs
are located in the Gulf of Mexico, four jackup rigs are located offshore
Indonesia, India and Qatar and the remaining jackup rig is now in a
Malaysia shipyard for modifications and enhancements. Of the 10 platform
rigs operated by Dual, seven are currently located in the Gulf of Mexico,
and one, which is not owned but managed by Dual, is located off the coast
of China. The remaining two platform rigs, formerly located off the coast
of California, have been retired.
The following analysis highlights the Company's operating results for the
three and nine months ended September 30, 1996 and 1995 (in thousands):
14
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
OPERATING RESULTS
- -----------------
Revenues $134,588 $ 71,793 $316,383 $195,348
Operating margin (1) 69,787 31,314 158,831 82,610
Operating income 43,366 14,403 92,991 33,225
Other expense (2,465) (2,052) (845) (5,403)
Provision for income taxes (12,979) (1,242) (26,595) (1,426)
Minority interest (710) (508) (2,068) (1,706)
Income from continuing
operations 27,212 10,601 63,483 24,690
Income from discontinued
operation - 5,679 - 6,296
Net income 27,212 16,280 63,483 30,986
REVENUES
- --------
Contract drilling
Gulf of Mexico jackup rigs $ 56,670 $ 29,946 $134,002 $ 83,840
North Sea jackup rigs 22,428 15,732 63,174 38,541
Asia jackup rigs 11,828 - 13,761 -
Total jackup rigs 90,926 45,678 210,937 122,381
Barge drilling rigs 18,145 15,484 53,232 46,630
Platform rigs 8,859 - 10,280 -
Dormant operations (2) 317 - 355 -
Total contract drilling 118,247 61,162 274,804 169,011
Marine transportation
AHTS (3) 4,146 3,950 11,776 10,125
Supply 10,078 5,488 24,484 13,777
Mini-supply 2,117 1,193 5,319 2,435
Total marine transportation 16,341 10,631 41,579 26,337
Total $134,588 $ 71,793 $316,383 $195,348
OPERATING MARGIN (1)
- ---------------------
Contract drilling
Gulf of Mexico jackup rigs $ 31,411 $ 11,093 $ 67,870 $ 30,097
North Sea jackup rigs 9,837 5,762 25,858 14,195
Asia jackup rigs 4,636 - 5,326 -
Total jackup rigs 45,884 16,855 99,054 44,292
Barge drilling rigs 11,863 9,911 34,976 29,565
Platform rigs 2,084 - 2,556 -
Dormant operations (2) 1,042 (17) 1,033 (196)
Total contract drilling 60,873 26,749 137,619 73,661
Marine transportation
AHTS (3) 2,096 2,144 6,100 4,717
Supply 5,789 2,050 12,678 3,819
Mini-supply 1,029 371 2,434 413
Total marine transportation 8,914 4,565 21,212 8,949
Total $ 69,787 $ 31,314 $158,831 $ 82,610
15
(1) Defined as revenues less operating expenses, exclusive of
depreciation and general and administrative expenses.
(2) The Company has a management contract on a non-owned platform rig off
the coast of China and owned one land rig in the Middle East, both
of which were inactive. The land rig was sold in mid-July 1996.
(3) Anchor handling tug supply vessels.
16
The following is an analysis of certain operating information of the
Company for the three and nine months ended September 30, 1996 and 1995:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
CONTRACT DRILLING
- -----------------
Utilization:
Gulf of Mexico jackup rigs 95% 93% 92% 88%
North Sea jackup rigs 83% 77% 85% 65%
Asia jackup rigs 98% - 96% -
Total jackup rigs 94% 89% 91% 83%
Barge drilling rigs 99% 80% 88% 88%
Platform rigs 78% - 77% -
Total 93% 86% 89% 85%
Average day rates:
Gulf of Mexico jackup rigs $ 28,422 $ 20,153 $ 26,105 $ 19,778
North Sea jackup rigs 46,880 42,183 45,265 41,635
Asia jackup rigs 25,733 - 25,591 -
Total jackup rigs 30,988 24,483 29,728 23,676
Barge drilling rigs 19,789 20,970 21,989 19,283
Platform rigs 16,612 - 16,375 -
Total $ 26,906 $ 23,464 $ 27,019 $ 22,239
MARINE TRANSPORTATION
- ---------------------
Utilization:
AHTS * 81% 88% 80% 81%
Supply 93% 87% 91% 79%
Mini-supply 95% 85% 85% 61%
Total 92% 87% 88% 75%
Average day rates:
AHTS * $ 9,265 $ 8,097 $ 8,899 $ 7,442
Supply 5,120 3,256 4,281 3,024
Mini-supply 3,020 1,915 2,838 1,831
Total $ 5,242 $ 3,794 $ 4,663 $ 3,621
* Anchor handling tug supply vessels.
The Company's consolidated revenues, operating margin and operating income
(defined as revenues less operating expenses, depreciation and general and
administrative expenses) for the three and nine months ended September 30,
1996 increased significantly from the same periods in 1995. The increases
were due primarily to increased average day rates and utilization for the
Company's rigs and vessels in 1996 and the return to work of various rigs
and vessels that were in shipyards for major modifications and enhancements
in the prior year periods.
17
Contract Drilling
- -----------------
The following is an analysis of the Company's offshore drilling rigs at
September 30, 1996 and 1995:
1996 1995
---- ----
Jackup rigs:
Gulf of Mexico 23 18
North Sea 6 6
Asia 5 (1) -
Total jackup rigs 34 24
Barge rigs - Venezuela 10 10
Platform rigs 8 (2) -
Total 52 34
(1) Includes one jackup rig operated by the Company that is 49%
owned.
(2) Seven are located in the Gulf of Mexico and one is not owned
but is operated under a management contract off the coast of
China.
Revenues and operating margins for the Company's contract drilling segment
for the three months ended September 30, 1996 were up 93% and 128%,
respectively, and for the nine months ended September 30, 1996 were up 63%
and 87%, respectively, compared to the prior year periods. The
significantly improved 1996 results were primarily due to increased current
year activity levels in the Gulf of Mexico and the North Sea and the
contribution from rigs acquired from Dual. Average day rates for the three
and nine months ended September 30, 1996 on the Company's jackup rigs in
the Gulf of Mexico increased by 41% and 32%, respectively, and average day
rates on the Company's North Sea jackup rigs increased by 11% and 9%,
respectively, as compared to the prior year periods.
The 1996 results also benefited from the return to work of three of the
Company's jackup rigs, two in the North Sea and one in the Gulf of Mexico,
that were undergoing major modifications and enhancements in the prior year
periods. The increased revenue and operating margin levels in 1996 were
also due to payments received in 1996 on the Venezuela barge drilling rigs
related to the recovery of past cost increases.
The above increases in revenue and operating margin were partially offset
by two barge drilling rigs in Venezuela coming off contract in the second
quarter of 1995 and a North Sea jackup rig undergoing modification in the
third quarter of 1996. One of the barge drilling rigs returned to work in
mid-May 1996 and the other in early-July 1996 under new long-term contracts
with Lagoven.
18
The Venezuelan currency experienced significant devaluation in the first
half of 1994 and the Venezuelan government established policies to control
the exchange rate of the Venezuelan currency and severely restricted the
conversion of Venezuelan currency to U.S. dollars. The Venezuelan
government further devalued the Venezuela currency against the U.S. dollar
in late 1995. In April 1996, the Venezuela government removed all
conversion and exchange controls and the Venezuelan currency began trading
freely. To date, the Company has not experienced problems associated with
receiving U.S. dollar payments with respect to the U.S. dollar portion of
its contracts with Lagoven. Changes in these conditions, other policy
enactments, or political developments in Venezuela could have an adverse
effect upon the Company. However, the Company believes such adverse
effects are unlikely due to the volume of U.S. dollars paid to the parent
company of Lagoven for its oil exports.
Marine Transportation
- ---------------------
The following is an analysis of the Company's marine transportation vessels
as of June 30, 1996 and 1995:
1996 1995
---- ----
AHTS * 6 6
Supply 23 21
Mini-Supply 8 8
Total 37 35
* Anchor handling tug supply vessels.
Revenues and operating margins for the Company's marine transportation
segment for the three months ended September 30, 1996 were up 54% and 95%,
respectively, and for the nine months ended September 30, 1996 were up 58%
and 137%, respectively, in comparison to the prior year periods. The 1996
results improved significantly from the prior year periods due to increased
current year activity levels in the Gulf of Mexico.
Average day rates for the Company's marine transportation vessels for the
three and nine months ended September 30, 1996 increased by 38% and 29%
from the prior year periods. The 1996 results also benefited from the
return to work in mid-1995 of four mini-supply vessels that were undergoing
modifications in the prior year periods and the purchase of six supply
vessels in late-1995, four of which were previously operated under
operating lease agreements.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense increased by 61% and 36% for the
three and nine months ended September 30, 1996, respectively, as compared
to the prior year periods due primarily to depreciation and amortization
associated with the rigs acquired from Dual, depreciation associated with
major modifications and enhancements on various rigs and vessels that
returned to work in 1995 and 1996, the addition of a North Sea jackup rig
in March 1995 and depreciation on six supply vessels purchased in late
1995.
19
Other Income (Expense)
- ----------------------
Other income (expense) for the three and nine months ended September 30,
1996 and 1995 was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Interest income $ 1,051 $ 986 $ 3,385 $ 4,787
Interest expense (6,319) (3,912) (14,755) (12,407)
Other, net 2,803 874 10,525 2,217
$(2,465) $(2,052) $ (845) $(5,403)
The Company's interest income decreased for the nine months ended September
30, 1996 as compared to the prior year period due primarily to lower
average cash balances in the current year.
The Company's interest expense increased for the three and nine months
ended September 30, 1996 as compared to the prior year periods due
primarily to the addition of the debt included in the Dual acquisition.
"Other, net" increased for the three months ended September 30, 1996 as
compared to the prior year period due primarily to a $2.9 million gain on
the sale of securities in the third quarter of 1996 as discussed in
"Note 3 - Other Income" to the Company's Consolidated Financial Statements.
"Other, net" increased for the nine months ended September 30, 1996 as
compared to the prior year period as a result of the $2.9 million gain on
sale of securities discussed above, and as a result of a $6.4 million gain
on settlement with TransAmerican Natural Gas Corporation in the second
quarter of 1996 as discussed in "Note 3 - Other Income" to the Company's
Consolidated Financial Statements.
Provision for Income Taxes
- --------------------------
The Company's provisions for income taxes increased significantly for the
three and nine months ended September 30, 1996 as compared to the prior
year periods due primarily to increased deferred income tax provisions in
the current year periods. The Company's U.S. deferred income tax
provisions for the three and nine months ended September 30, 1996
increased by $9.8 million and $21.4 million, respectively, from the prior
year periods due primarily to the timing of the recognition of the expected
utilization or expiration of U.S. net operating loss carryforwards. The
deferred income tax provisions in the U.S., Venezuela and the United
Kingdom also increased for the three and nine months ended September 30,
1996 as compared to the prior year periods due, in part, to increased
differences in the book and tax basis of property and equipment as the
Company's asset additions and enhancements have increased the difference
between the book and tax basis of the Company's property and equipment.
20
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Capital Expenditures
- ----------------------------------
The Company's cash flow from operations and capital expenditures for the
nine months ended September 30, 1996 and 1995 were as follows (in
thousands):
1996 1995
-------- --------
Cash flow from operations $148,131 $ 61,246
Capital expenditures
Sustaining $ 10,755 $ 8,878
Enhancements 82,262 81,555
Acquisitions 13,271 12,760
$106,288 $103,193
Cash flow from operations increased by $86.9 million for the nine months
ended September 30, 1996 as compared to the prior year period. The
increase in cash flow from operations is primarily a result of increased
operating margins in the first nine months of 1996 as compared to the prior
year period.
Management anticipates that capital expenditures in 1996 will be
approximately $180.0 million to $210.0 million, including $20.0 million to
$25.0 million for existing operations, $110.0 million to $120.0 million
modifications and enhancements and $50.0 million to $65.0 million for
acquisitions of rigs and vessels. The Company may spend additional funds
to acquire rigs or vessels in 1996, depending on market conditions and
opportunities.
Financing and Capital Resources
- -------------------------------
The Company's long-term debt, total capital and debt to capital ratios at
September 30, 1996 and December 31, 1995 are summarized below (in
thousands, except percentages):
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Long-term debt $ 253,524 $159,201
Total capital 1,068,236 690,450
Long-term debt to total capital 24% 23%
The increase in long-term debt relates primarily to $128.2 million of debt
assumed in the acquisition of Dual, offset in part by scheduled repayments
of existing debt. The total capital of the Company increased due primarily
to the issuance of shares of the Company's common stock in the acquisition
of Dual valued at $218.4 million, the net increase in long-term debt as
discussed above and the profitability of the Company for the nine months
ended September 30, 1996.
21
On June 12, 1996, the Company acquired Dual pursuant to an Agreement and
Plan of Merger among the Company, DDC Acquisition Company, a wholly owned
subsidiary of the Company, and Dual (the "Merger Agreement") approved by
Dual stockholders on that date. Under the terms of the Merger Agreement,
each share of Dual common stock was immediately converted into the right to
receive 0.625 shares of the Company's common stock. The Company issued
approximately 10.1 million shares of its common stock to Dual stockholders
in connection with the acquisition of Dual.
The Company had $39.0 million undrawn under a revolving line of credit at
September 30, 1996. The revolving line of credit is reduced semi-annually
by $7.0 million commencing in October 1996, with the remaining line
expiring in October 2001. See "Note 4 - Long-Term Debt" to the Company's
Consolidated Financial Statements.
The Company's liquidity position at September 30, 1996 and December 31,
1995 is summarized in the table below (in thousands, except ratios):
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Cash and short-term investments $89,521 $82,064
Working capital 95,149 78,945
Current ratio 1.9 1.9
Based on current energy industry conditions, management believes cash flow
from operations, the Company's existing credit facility and the Company's
working capital should be sufficient to fund the Company's short and long-
term liquidity needs.
OTHER MATTERS
As of September 30, 1996, the Company has purchased $23.2 million (face
amount) of the Dual 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8%
Notes") on the open market. Additionally, in July 1996 $5.0 million (face
amount) of the 9 7/8% Notes were redeemed pursuant to an offer by Dual to
purchase the 9 7/8% Notes following a change in control.
In October 1996, the Company agreed to purchase a jackup rig located in
Asia. The purchase was completed in November 1996.
PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The
forward-looking statements are made pursuant to safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The factors that
could cause actual results to differ materially include the following:
industry conditions and competition, cyclical nature of the industry,
worldwide expenditures for oil and gas drilling, operational risks and
insurance, risks associated with operating in foreign jurisdictions, and
the risks described from time to time in the Company's reports to the
22
Securities and Exchange Commission, which include the Company's Annual
Report on Form 10-K for the year ended December 31, 1995. Significant and
unexpected deterioration in oil and natural gas prices could adversely
affect the level of offshore drilling activity the Company believes is
sustainable for the remainder of 1996.
23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
Exhibit No.
-----------
*15.1 Letter of Independent Accountants regarding
Awareness of Incorporation by Reference
*27.1 Financial Data Schedule. (Exhibit 27 is
being submitted as an exhibit only in the
electronic format of this Quarterly Report on
Form 10-Q being submitted to the Securities
and Exchange Commission.)
-----------
* Filed herewith
(b) Reports on Form 8-K
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSCO INTERNATIONAL INCORPORATED
Date: November 11, 1996 /s/ C. Christopher Gaut
------------------- ----------------------------------
C. Christopher Gaut
Chief Financial Officer
/s/ H. E. Malone
----------------------------------
H. E. Malone, Corporate Controller
and Chief Accounting Officer
25