UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
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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 12 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 7, 2022 Common stock, $0.0001 par value per share
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2022
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PAGE NO. |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amounts)
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Successor |
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September 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Accounts receivable |
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Less: allowance for credit losses |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Asset held for sale |
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Total current assets |
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Drilling and other property and equipment, net of |
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accumulated depreciation |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Taxes payable |
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Current finance lease liabilities |
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Total current liabilities |
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Long-term debt |
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Noncurrent finance lease liabilities |
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Deferred tax liability |
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Other liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock (par value $ |
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Common stock (par value $ |
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Additional paid-in capital |
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Treasury stock |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Successor |
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Three Months |
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Three Months |
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Ended |
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Ended |
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September 30, 2022 |
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September 30, 2021 |
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Revenues: |
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Contract drilling |
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$ |
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$ |
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Revenues related to reimbursable expenses |
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Total revenues |
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Operating expenses: |
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Contract drilling, excluding depreciation |
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Reimbursable expenses |
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Depreciation |
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General and administrative |
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Gain on disposition of assets |
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Total operating expenses |
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Operating (loss) income |
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Other income (expense): |
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Interest income |
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Interest expense, net of amounts capitalized |
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Foreign currency transaction gain |
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Reorganization items, net |
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Other, net |
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Loss before income tax benefit |
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Income tax benefit |
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Net income (loss) |
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$ |
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$ |
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Income (loss) per share, Basic and Diluted |
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$ |
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$ |
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Weighted-average shares outstanding, Basic |
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Weighted-average shares outstanding, Diluted |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Successor |
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Predecessor |
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Period from |
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Period from |
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Nine Months |
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April 24, 2021 |
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January 1, 2021 |
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Ended |
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through |
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through |
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September 30, 2022 |
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September 30, 2021 |
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April 23, 2021 |
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Revenues: |
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Contract drilling |
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$ |
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$ |
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$ |
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Revenues related to reimbursable expenses |
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Total revenues |
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Operating expenses: |
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Contract drilling, excluding depreciation |
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Reimbursable expenses |
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Depreciation |
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General and administrative |
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Impairment of assets |
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Gain on disposition of assets |
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( |
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Total operating expenses |
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Operating loss |
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( |
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Other income (expense): |
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Interest income |
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Interest expense, net of amounts capitalized (excludes $ |
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( |
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( |
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( |
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Foreign currency transaction (loss) gain |
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( |
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( |
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Reorganization items, net |
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( |
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Other, net |
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Loss before income tax benefit (expense) |
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( |
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( |
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( |
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Income tax benefit (expense) |
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( |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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Loss per share, Basic and Diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted-average shares outstanding, Basic and Diluted |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Three Months Ended September 30, 2022 |
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Additional |
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Total |
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Common Stock |
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Paid-In |
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Accumulated |
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Treasury Stock |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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July 1, 2022 (Successor) |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation, net of tax |
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— |
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— |
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( |
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September 30, 2022 (Successor) |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Nine Months Ended September 30, 2022 |
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Additional |
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Total |
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Common Stock |
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Paid-In |
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Accumulated |
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Treasury Stock |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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January 1, 2022 (Successor) |
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$ |
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$ |
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$ |
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— |
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$ |
— |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Stock-based compensation, net of tax |
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— |
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— |
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( |
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September 30, 2022 (Successor) |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Three Months Ended September 30, 2021 |
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Additional |
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Total |
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Common Stock |
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Paid-In |
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Accumulated |
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Treasury Stock |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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July 1, 2021 (Successor) |
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$ |
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$ |
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$ |
( |
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— |
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$ |
— |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Stock-based compensation, net of tax |
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— |
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— |
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— |
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— |
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September 30, 2021 (Successor) |
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$ |
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$ |
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$ |
( |
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— |
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$ |
— |
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$ |
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Nine Months Ended September 30, 2021 |
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Additional |
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Retained Earnings |
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Total |
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Common Stock |
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Paid-In |
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(Accumulated |
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Treasury Stock |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit) |
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Shares |
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Amount |
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Equity |
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January 1, 2021 (Predecessor) |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Cancellation of Predecessor equity |
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( |
) |
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( |
) |
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( |
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( |
) |
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( |
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April 23, 2021 (Predecessor) |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of Successor equity |
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April 24, 2021 (Successor) |
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$ |
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$ |
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$ |
— |
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— |
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$ |
— |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation, net of tax |
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— |
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— |
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— |
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— |
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|
|
|
|||
September 30, 2021 (Successor) |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
— |
|
|
$ |
— |
|
|
$ |
|
||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
|
|
|
Period from |
|
|
|
Period from |
|
|||
|
|
Nine Months Ended |
|
|
April 24, 2021 |
|
|
|
January 1, 2021 |
|
|||
|
|
September 30, |
|
|
through |
|
|
|
through |
|
|||
|
|
2022 |
|
|
September 30, 2021 |
|
|
|
April 23, 2021 |
|
|||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in |
|
|
|
|
|
|
|
|
|
|
|||
Depreciation |
|
|
|
|
|
|
|
|
|
|
|||
Loss on impairment of assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Reorganization items, net |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Gain on disposition of assets |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Deferred tax provision |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
— |
|
||
Contract liabilities, net |
|
|
( |
) |
|
|
|
|
|
|
|
||
Contract assets, net |
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Deferred contract costs, net |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Collateral deposits |
|
|
|
|
|
|
|
|
|
— |
|
||
Other assets, noncurrent |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Other liabilities, noncurrent |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
( |
) |
|
|
|
|
||
Taxes payable |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|||
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Proceeds from disposition of assets, net of disposal costs |
|
|
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|||
Repayment of borrowings under revolving credit facility |
|
|
— |
|
|
|
— |
|
|
|
|
( |
) |
Borrowings on exit facilities |
|
|
|
|
|
|
|
|
|
|
|||
Repayments on exit facilities |
|
|
— |
|
|
|
( |
) |
|
|
|
— |
|
Issuance of exit notes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Principal payments of finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
— |
|
Debt issuance costs and arrangement fees |
|
|
— |
|
|
|
— |
|
|
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
|
|
|
( |
) |
||
Net change in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
|
|||
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The unaudited condensed consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries, which we refer to as “Diamond Offshore,” “Company,” “we,” “us” or “our,” should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A (File No. 1-13926). To facilitate our financial statement presentations, we refer to the post-emergence reorganized company in these unaudited condensed consolidated financial statements and footnotes as the “Successor” for periods subsequent to April 23, 2021 and to the pre-emergence company as the “Predecessor” for periods on or prior to April 23, 2021. This delineation between Predecessor periods and Successor periods is shown in the unaudited condensed consolidated financial statements, certain tables within the footnotes to the unaudited condensed consolidated financial statements and other parts of this Quarterly Report on Form 10-Q through the use of a black line, calling out the lack of comparability between periods.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (or GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, pursuant to such rules and regulations, they do not include all disclosures required by GAAP for annual financial statements. The condensed consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Diamond Offshore’s condensed consolidated balance sheets, statements of operations, statements of stockholders’ equity and statements of cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years.
Fresh Start Accounting
Upon our emergence from bankruptcy on April 23, 2021 (or the Effective Date), we met the criteria for and were required to adopt fresh start accounting in accordance with the Financial Accounting Standards Board (or FASB) Accounting Standards Codification Topic No. 852 – Reorganizations, which on the Effective Date resulted in a new entity, the Successor, for financial reporting purposes, with no beginning retained earnings or deficit as of the fresh start reporting date.
Fresh start accounting requires that new fair values be established for the Company’s assets, liabilities, and equity as of the Effective Date. The Effective Date fair values of the Successor’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets of the Predecessor. In addition, as a result of the application of fresh start accounting and the effects of the implementation of our restructuring plan, the financial statements for periods after April 23, 2021 will not be comparable with the financial statements prior to and including April 23, 2021. References to “Successor” refer to the Company and its financial position and results of operations after the Effective Date (including December 31, 2021, September 30, 2022, the three-month and nine-month periods ended September 30, 2022 and the period from April 24, 2021 through September 30, 2021). References to “Predecessor” refer to the Company and its financial position and results of operations on or before the Effective Date (including the period from January 1, 2021 through April 23, 2021 and the period from April 1, 2021 through April 23, 2021).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.
9
Restricted Cash
2. Revenue from Contracts with Customers
The activities that primarily drive the revenue earned from our contract drilling services include (i) providing a drilling rig and the crew and supplies necessary to operate the rig, (ii) mobilizing and demobilizing the rig to and from the drill site and (iii) performing rig preparation activities and/or modifications required for the contract. Consideration received for performing these activities may consist of dayrate drilling revenue, mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue. We account for these integrated services provided within our drilling contracts as a single performance obligation satisfied over time and comprised of a series of distinct time increments in which we provide drilling services.
Consideration for activities that are not distinct within the context of our contracts and do not correspond to a distinct time increment within the contract term are allocated across the single performance obligation and recognized ratably over the initial term of the contract (which is the period we estimate to be benefited from the corresponding activities and generally ranges from to
Revenues Related to Managed Rigs
In May 2021, we entered into an arrangement with Aquadrill LLC, an offshore drilling company, for us to provide management and marketing services (or the MMSA) for
Per the MMSA, for stacked rigs we earn a daily service fee and are entitled to reimbursement of direct costs incurred in accordance with the agreement. For rigs operating under a drilling contract, in addition to the service fee and reimbursement of direct costs, we are entitled to a gross margin bonus, as adjusted pursuant to the MMSA, and a commission. The daily service fee revenue is recognized in line with the contractual rate billed for the services provided and is reported in “Contract drilling” in our unaudited Condensed Consolidated Statements of Operations. We record the revenue relating to reimbursed expenses at the gross amount incurred and billed to the rig owner, as “Revenues related to reimbursable expenses” in our unaudited Condensed Consolidated Statements of Operations.
In March 2022, the managed rig, Auriga, began a one-year contract in the U.S. Gulf of Mexico. Upon commencement of drilling operations, the MMSA for the Auriga was suspended and replaced by a charter agreement for the duration of the drilling contract. We entered into the drilling contract directly with the customer and receive and recognize revenue under the terms of the contract. We report such revenue as “Contract drilling” in our unaudited Condensed Consolidated Statements of Operations. In addition, we have determined that the charter arrangement is an operating lease, and the related charter fee has been reported as lease expense within “Contract drilling, excluding depreciation” in our unaudited Condensed Consolidated Statements of Operations.
10
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities related to our contracts with customers (in thousands):
|
|
Successor |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Trade receivables |
|
$ |
|
|
$ |
|
||
Current contract assets (1) |
|
|
|
|
|
|
||
Current contract liabilities (deferred revenue) (1) |
|
|
( |
) |
|
|
( |
) |
Noncurrent contract liabilities (deferred revenue) (1) |
|
|
( |
) |
|
|
( |
) |
Changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):
|
|
Successor |
|
|
|
|
Net Contract |
|
|
|
|
Balances |
|
|
Contract assets at January 1, 2022 |
|
$ |
|
|
Contract liabilities at January 1, 2022 |
|
|
( |
) |
Net balance at January 1, 2022 |
|
|
( |
) |
Decrease due to amortization of revenue included in the beginning contract liability balance |
|
|
|
|
Increase due to cash received, excluding amounts recognized as revenue during the period |
|
|
( |
) |
Increase due to revenue recognized during the period but contingent on future performance |
|
|
|
|
Decrease due to transfer to receivables during the period |
|
|
( |
) |
Net balance at September 30, 2022 |
|
$ |
( |
) |
Contract assets at September 30, 2022 |
|
$ |
|
|
Contract liabilities at September 30, 2022 |
|
|
( |
) |
Transaction Price Allocated to Remaining Performance Obligations
The following table reflects the specified types of revenue expected to be recognized in the future related to unsatisfied performance obligations as of September 30, 2022 (in thousands):
|
|
For the Years Ending December 31, |
|
|||||||||||||
|
|
(1) |
|
|
|
|
|
|
Total |
|
||||||
Mobilization and contract preparation revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Capital modification revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demobilization and other deferred revenue |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
11
The revenue included above consists of expected fixed mobilization and upgrade revenue for both wholly and partially unsatisfied performance obligations, as well as expected variable mobilization and upgrade revenue for partially unsatisfied performance obligations, which has been estimated for purposes of allocating across the entire corresponding performance obligations. The amounts are derived from the specific terms within drilling contracts that contain such provisions, and the expected timing for recognition of such revenue is based on the estimated start date and duration of each respective contract based on information known at September 30, 2022. The actual timing of recognition of such amounts may vary due to factors outside of our control. We have applied the disclosure practical expedient in FASB Accounting Standards Update (or ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments, and have not included estimated variable consideration related to wholly unsatisfied performance obligations or to distinct future time increments within our contracts, including dayrate revenue.
3. Impairment of Assets
2021 Impairment. During the first quarter of 2021, we identified indicators that the carrying amounts of certain of our assets may not be recoverable and evaluated
4. Supplemental Financial Information
Unaudited Condensed Consolidated Balance Sheets Information
Accounts receivable, net of allowance for credit losses, consist of the following (in thousands):
|
|
Successor |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Trade receivables |
|
$ |
|
|
$ |
|
||
Federal income tax receivables |
|
|
|
|
|
|
||
Value added tax receivables |
|
|
|
|
|
|
||
Related party receivables |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
The allowance for credit losses at September 30, 2022 and December 31, 2021 represents our estimate of credit losses associated with our “Trade receivables” and “Current contract assets.” See Note 5 “Financial Instruments and Fair Value Disclosures” for a discussion of our concentrations of credit risk and allowance for credit losses.
12
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
Successor |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Prepaid taxes |
|
$ |
|
|
$ |
|
||
Deferred contract costs |
|
|
|
|
|
|
||
Rig spare parts and supplies |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid rig costs |
|
|
|
|
|
|
||
Current contract assets |
|
|
|
|
|
|
||
Collateral deposits |
|
|
— |
|
|
|
|
|
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Accrued liabilities consist of the following (in thousands):
|
|
Successor |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Rig operating costs |
|
$ |
|
|
$ |
|
||
Payroll and benefits |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Contract advances |
|
|
|
|
|
— |
|
|
Current operating lease liability |
|
|
|
|
|
|
||
Interest payable |
|
|
|
|
|
|
||
Shorebase and administrative costs |
|
|
|
|
|
|
||
Personal injury and other claims |
|
|
|
|
|
|
||
Accrued capital project/upgrade costs |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Unaudited Condensed Consolidated Statements of Cash Flows Information
Noncash operating, investing and financing activities excluded from the unaudited Condensed Consolidated Statements of Cash Flows and other supplemental cash flow information are as follows (in thousands):
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
|
|
|
Period from |
|
|
|
Period from |
|
|||
|
|
Nine Months |
|
|
April 24, 2021 |
|
|
|
January 1, 2021 |
|
|||
|
|
Ended |
|
|
through |
|
|
|
through |
|
|||
|
|
September 30, |
|
|
September 30, |
|
|
|
April 23, |
|
|||
|
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
|||
Accrued but unpaid capital expenditures at period end |
|
$ |
|
|
$ |
|
|
|
$ |
|
|||
Accrued but unpaid debt issuance costs and arrangement fees (1) |
|
|
— |
|
|
|
|
|
|
|
|
||
Common stock withheld for payroll tax obligations (2) |
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Cash interest payments |
|
|
|
|
|
|
|
|
|
|
|||
Cash paid for reorganization items, net |
|
|
— |
|
|
|
|
|
|
|
|
||
Cash income taxes paid, net of (refunds): |
|
|
|
|
|
|
|
|
|
|
|||
Foreign |
|
|
|
|
|
|
|
|
|
|
|||
U.S. Federal |
|
|
|
|
|
|
|
|
|
— |
|
||
State |
|
|
— |
|
|
|
— |
|
|
|
|
( |
) |
13
5. Financial Instruments and Fair Value Disclosures
Concentrations of Credit Risk and Allowance for Credit Losses
Our credit risk corresponds primarily to trade receivables. Since the market for our services is the offshore oil and gas industry, our customer base consists primarily of major and independent oil and gas companies, as well as government-owned oil companies. At September 30, 2022, we believed that we had potentially significant concentrations of credit risk due to the number of rigs we had contracted and our limited number of customers, as some of our customers which had contracted for multiple rigs.
In general, before working for a customer with whom we have not had a prior business relationship and/or whose financial stability may be uncertain, we perform a credit review on that customer, including a review of its credit ratings and financial statements. Based on our credit review, we may require that the customer have a bank issue a letter of credit on its behalf, prepay for the services in advance or provide other credit enhancements. At September 31, 2022, we had not required any credit enhancements by our customers or required any to pay for services in advance. We have historically used the specific identification method to identify and reserve for uncollectible accounts. The amounts reserved for uncollectible accounts in previous periods have not been significant, individually or in comparison to our total revenues. At September 30, 2022, $
Pursuant to FASB ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and its related amendments (or collectively, CECL), we have reviewed our historical credit loss experience over a look-back period of ten years, which we deem to be representative of both up-turns and down-cycles in the offshore drilling industry. Based on this review, we developed a credit loss factor using a weighted-average ratio of our actual credit losses to revenues during the look-back period. In addition, we also considered current and future anticipated economic conditions in determining our credit loss factor, including crude oil prices and liquidity of credit markets. In applying the requirements of CECL, we segregated our trade receivables into three credit loss risk pools based on customer credit ratings, each of which represents a tier of increasing credit risk. We calculated a credit loss factor based on historical loss rate information and then applied a multiple of our credit loss factor to each of these risk pools, considering the impact of current and future economic information and the level of risk associated with these pools, to calculate our current estimate of credit losses. Trade receivables that are fully covered by allowances for credit losses are excluded from these risk pools for purposes of calculating our current estimate of credit losses.
For purposes of calculating our current estimate of credit losses at September 30, 2022 and December 31, 2021, all trade receivables were deemed to be in a single risk pool based on their credit ratings at each respective period. Our current estimate of credit losses under CECL was $
Fair Values
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair value:
14
Level 1 |
Quoted prices for identical instruments in active markets. |
Level 2 |
Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
Level 3 |
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of transparency as to the inputs used. |
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis in accordance with GAAP. In addition, certain assets and liabilities may be recorded at fair value on a nonrecurring basis. Generally, we record assets at fair value on a nonrecurring basis as a result of impairment charges.
Assets and liabilities measured at fair value are summarized below (in thousands).
|
|
Successor |
|
|
|||||||||||||||||||||
|
|
September 30, 2022 |
|
|
|||||||||||||||||||||
|
|
Fair Value Measurements Using |
|
|
Total (Loss) Gain |
|
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Liabilities at |
|
|
Three Months Ended (1) |
|
|
Nine Months Ended (1) |
|
|
||||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liability-classified Director restricted stock units |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|||
|
|
Successor |
|
|||||||||||||
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Fair Value Measurements Using |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Assets at |
|
||||
Nonrecurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Impaired assets (1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
We believe that the carrying amounts of our other financial assets and liabilities (excluding our Exit Term Loans and First Lien Notes (each as defined below in Note 7 “Successor Long-Term Debt”)), which are not measured at fair value in our unaudited Condensed Consolidated Balance Sheets, approximate fair value based on the following assumptions:
15
Our debt is not measured at fair value on a recurring basis; however, under the GAAP fair value hierarchy, our long-term debt would be considered Level 2 liabilities. The fair value of these instruments was derived using valuation specialists at September 30, 2022 and December 31, 2021.
Fair values and related carrying values of our long-term debt are shown below (in millions).
|
|
Successor |
|
|||||||||||||
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
Exit Term Loans |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
First Lien Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
We have estimated the fair value amounts by using appropriate valuation methodologies and information available to management. Considerable judgment is required in developing these estimates, and accordingly, no assurance can be given that the estimated values are indicative of the amounts that would be realized in a free market exchange.
6. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows (in thousands):
|
|
Successor |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Drilling rigs and equipment |
|
$ |
|
|
$ |
|
||
Finance lease right of use asset |
|
|
|
|
|
|
||
Land and buildings |
|
|
|
|
|
|
||
Office equipment and other |
|
|
|
|
|
|
||
Cost |
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Drilling and other property and equipment, net |
|
$ |
|
|
$ |
|
||
7. Successor Long-Term Debt
Exit Revolving Credit Agreement
On the Effective Date, we entered into a senior secured revolving credit agreement (or the Exit Revolving Credit Agreement), which provides for a $
Borrowings under the Exit RCF may be used to finance capital expenditures, for working capital and other general corporate purposes. Availability of borrowings under the Exit RCF is subject to the satisfaction of certain conditions, including restrictions on borrowings, as provided in the Exit Revolving Credit Agreement. At September 30, 2022, we had borrowings outstanding of $
At November 7, 2022, we had borrowings of $
On the Effective Date, we also entered into a senior secured term loan credit agreement (or the Exit Term Loan Credit Agreement), which provides for a $
16
on
Exit Debt
At September 30, 2022, the carrying value of the Successor long-term debt (or Exit Debt), net of unamortized discount, premium and debt issuance costs, was comprised as follows (in thousands):
|
|
Successor |
|
|
|
|
September 30, |
|
|
|
|
2022 |
|
|
Borrowings under Exit RCF |
|
$ |
|
|
Exit Term Loans |
|
|
|
|
First Lien Notes |
|
|
|
|
Total Exit Debt, net |
|
$ |
|
|
The borrower under the Exit RCF and Exit Term Loan Credit Agreement (or, collectively, the Credit Facilities) is Diamond Foreign Asset Company (or DFAC) (or the Borrower) and the co-issuers of the
The Exit Revolving Credit Agreement obligates the Borrower and its restricted subsidiaries to comply with certain financial maintenance covenants as defined in the Exit Revolving Credit Agreement. The Exit Revolving Credit Agreement, Exit Term Loan Credit Agreement and the indenture governing the First Lien Notes contain negative covenants that limit, among other things, the Borrower’s ability and the ability of its restricted subsidiaries to: (i) incur, assume or guarantee additional indebtedness; (ii) create, incur or assume liens; (iii) make investments; (iv) merge or consolidate with or into any other person or undergo certain other fundamental changes; (v) transfer or sell assets; (vi) pay dividends or distributions on capital stock or redeem or repurchase capital stock; (vii) enter into transactions with certain affiliates; (viii) repay, redeem or amend certain indebtedness; (ix) sell stock of its subsidiaries; or (x) enter into certain burdensome agreements. These negative covenants are subject to a number of important limitations and exceptions.
Additionally, these agreements contain other covenants, representations and warranties and events of default that are customary for a financing of this type. At September 30, 2022, we were in compliance with all covenants under the Exit Revolving Credit Agreement.
8. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries. With respect to each claim or exposure, we have made an assessment, in accordance with GAAP, of the probability that the resolution of the matter would ultimately result in a loss. When we determine that an unfavorable resolution of a matter is probable and such amount of loss can be determined, we record a liability for the amount of the estimated loss at the time that both of these criteria are met. Our management believes that we have recorded adequate accruals for any liabilities that may reasonably be expected to result from these claims.
Non-Income Tax and Related Claims. We have received assessments related to, or otherwise have exposure to, non-income tax items such as sales and-use tax, value-added tax, ad valorem tax, custom duties, and other similar taxes in various taxing jurisdictions. We have determined that we have a probable loss for certain of these taxes and the related penalties and interest and, accordingly, have recorded a $
17
Consolidated Balance Sheets. We intend to defend these matters vigorously; however, the ultimate outcome of these assessments and exposures could result in additional taxes, interest and penalties for which the fully assessed amounts would have a material adverse effect on our financial condition, results of operations or cash flows.
Other Litigation. We have been named in various other claims, lawsuits or threatened actions that are incidental to the ordinary course of our business, including a claim by one of our customers in Brazil, Petróleo Brasileiro S.A. (or Petrobras), that it will seek to recover from its contractors, including us, any taxes, penalties, interest and fees that it must pay to the Brazilian tax authorities for our applicable portion of withholding taxes related to Petrobras’ charter agreements with its contractors. We intend to defend these matters vigorously; however, litigation is inherently unpredictable, and the ultimate outcome or effect of any claim, lawsuit or action cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of any litigation matter. Any claims against us, whether meritorious or not, could cause us to incur significant costs and expenses and require significant amounts of management and operational time and resources. In the opinion of our management, no such pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Personal Injury Claims. Under our current insurance policies, we self-insure $
The Jones Act is a federal law that permits seamen to seek compensation for certain injuries during the course of their employment on a vessel and governs the liability of vessel operators and marine employers for the work-related injury or death of an employee. We engage outside consultants to assist us in estimating our aggregate liability for personal injury claims based on our historical losses and utilizing various actuarial models. We allocate a portion of the aggregate liability to “Accrued liabilities” based on an estimate of claims expected to be paid within the next twelve months with the residual recorded as “Other liabilities.” At September 30, 2022, our estimated liability for personal injury claims was $
Purchase Obligations. At September 30, 2022, we had
Services Agreement. In February 2016, we entered into a
In addition, we lease Well Control Equipment for our drillships under ten-year finance leases.
Letters of Credit and Other. We were contingently liable as of September 30, 2022 in connection with approximately $
18
The letter of credit collateralizing these bonds was issued under the Exit RCF and cannot require collateral except in events of default.
9. Income Taxes
We currently claim benefits provided under an existing tax treaty between the United Kingdom and the Republic of Senegal that allows us to claim a reduced rate of income tax withholding with respect to certain bareboat charter revenue from Senegalese sources. On May 10, 2022, The Republic of Senegal deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (or the MLI), which will alter certain provisions of the existing United Kingdom-Senegal Tax Treaty, effective for periods beginning on or after January 1, 2023. We are currently analyzing the impact that the Republic of Senegal’s ratification of the MLI will have on our tax position and, consequently, our consolidated financial position, results of operations and cash flows.
On August 16, 2022, the United States (or U.S.) enacted the Inflation Reduction Act (or IRA). Among other provisions, IRA (i) imposes a
10. Earnings (Loss) Per Share
We compute basic earnings (loss) per share by dividing net income (loss) available to holders of our common stock by the weighted-average number of shares of our common stock outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue our common stock (common stock equivalents) were exercised or converted into common stock. Basic and diluted earnings per share (or EPS) for the Successor periods including the three-month and nine-month periods ended September 30, 2022 and the period from April 24, 2021 through September 30, 2021 and the Predecessor period from January 1, 2021 through April 23 2021 was calculated in accordance with the treasury stock method, and includes all potentially dilutive stock equivalents, including warrants, restricted stock awards, restricted stock unit awards and performance stock unit awards.
For periods in which a net loss available to holders of our common stock exists, no amounts are allocated to non-vested share awards, as the inclusion of such amounts would be antidilutive.
A reconciliation of the numerators and denominators of our basic and diluted EPS computations are summarized as follows (in thousands).
|
|
Successor |
|
|||||
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net income (loss) – basic and diluted numerator |
|
$ |
|
|
$ |
( |
) |
|
Weighted average shares – basic (denominator): |
|
|
|
|
|
|
||
Dilutive effect of stock-based awards |
|
|
|
|
|
|
||
Weighted average shares including conversions – diluted (denominator) |
|
|
|
|
|
|
||
19
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
|
|
|
Period from |
|
|
|
Period from |
|
|||
|
|
Nine Months |
|
|
April 24, 2021 |
|
|
|
January 1, 2021 |
|
|||
|
|
Ended |
|
|
through |
|
|
|
through |
|
|||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
|
April 23, 2021 |
|
|||
Net loss – basic and diluted numerator |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
( |
) |
Weighted average shares – basic (denominator): |
|
|
|
|
|
|
|
|
|
|
|||
Dilutive effect of stock-based awards |
|
|
|
|
|
|
|
|
|
|
|||
Weighted average shares including conversions – diluted (denominator) |
|
|
|
|
|
|
|
|
|
|
|||
As of September 30 2022, we had
The computation of EPS for the Successor nine-month period ended September 30, 2022 and the period from April 24, 2021 through September 30, 2021, excludes non-vested stock-based awards of
11. Segments and Geographic Area Analysis
We provide contract drilling services with different types of offshore drilling rigs and also provide such services in many geographic locations. However, we have aggregated these operations into
Our drilling rigs are highly mobile and may be moved to other markets throughout the world in response to market conditions or customer needs. At September 30, 2022, our active drilling rigs were located offshore
The following tables provide information about disaggregated revenue by country (in thousands):
|
|
Successor |
|
|||||||||
|
|
Three Months Ended September 30, 2022 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
20
|
|
Successor |
|
|||||||||
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Successor |
|
|||||||||
|
|
Three Months Ended September 30, 2021 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Successor |
|
|||||||||
|
|
Period from April 24, 2021 through September 30, 2021 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Predecessor |
|
|||||||||
|
|
Period from January 1, 2021 through April 23, 2021 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
21
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements (including the notes thereto) included in Item 1 of Part I of this report, Item 1A, “Risk Factors” included in Part II of this report and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A. References to “Diamond Offshore,” “Company,” “we,” “us” or “our” mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.
We provide contract drilling services to the energy industry around the globe with a fleet of 14 floater rigs (four owned drillships, eight semisubmersibles and two managed rigs). See “– Market Overview.”
Fresh Start Accounting
Upon emergence from bankruptcy on April 23, 2021 (or the Effective Date), we met the criteria for and were required to adopt fresh start accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic No. 852 – Reorganizations. As a result of the application of fresh start accounting and the effects of the implementation of our restructuring plan, the financial statements for the period after April 23, 2021 will not be comparable with the financial statements prior to and including April 23, 2021. References to “Successor” refer to the Company and its financial position and results of operations after the Effective Date (including December 31, 2021, September 30, 2022, the three-month and nine-month periods ended September 30, 2022, and the period from April 24, 2021 through September 30, 2021). References to “Predecessor” refer to the Company and its financial position and results of operations on or before the Effective Date (including the period from January 1, 2021 through April 23, 2021). See Note 1 “General Information” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report.
Market Overview
Energy industry fundamentals continue to support the evolution of a global growth cycle in our business. The strong commodity price environment continues to positively impact the demand for offshore drilling services as the focus on energy security and recent OPEC+ actions interact with tightening commodity supply. Brent oil prices averaged approximately $96 per barrel in the third quarter of 2022, down slightly from the previous quarter. Full year 2022 Brent oil prices are anticipated to average approximately $102 per barrel, which is approximately 44% higher compared to the 2021 average according to the October 2022 Short Term Energy Outlook report by the U.S. Energy Information Administration (or EIA). In addition, the EIA expects full year 2022 natural gas prices in the U.S. to be approximately 76% higher than the 2021 average. These elevated commodity prices continue to generate significant cash flow for many of our potential customers, and we anticipate that further capital investments by oil and gas companies will be required to mitigate the cumulative impact from the prolonged period of underinvestment in the oil and gas industry.
Demand for floating offshore drilling rigs remains strong, with utilization averaging over 80% for the fourth consecutive quarter and exceeding pre-pandemic levels, based on industry reports. The number of tendering opportunities and forecasts from certain industry analysts indicate that spending for offshore drilling services is likely to continue to increase in 2023 as compared to 2022. These analysts predict that the total offshore greenfield project commitments will be approximately $138 billion in 2023 compared to $72 billion in 2022, representing a 92% increase year over year. Much of this demand growth is projected to be driven by growth in South America and the United States, where we currently have operations. Additional activity is expected in the North Sea sector as energy security concerns and supportive regulatory action may encourage additional spending by our potential customers. As dayrates continue to improve, however, it may become economic for drillers to reactivate idle rig capacity or deliver newbuilds, limiting market upside or potentially placing downward pressure on utilization and dayrates.
Despite the upward trends in our general market, supply chain constraints and inflationary pressures persist, driving some increases in our operating expense; however, these same forces may constrain rig supply in the near term as they could delay the timing and increase the cost of idle capacity returning to the market.
22
Customer capital allocation decisions will continue to affect demand for our services. Investment mixes over time, coupled with energy demand and regulatory measures, could lead to reduced demand for offshore drilling services in the long term. Notwithstanding this possibility, global energy demand continues to grow while energy supply remains constrained, and we expect increased investment in both traditional and renewable sources of energy to be required for years to come, much of which we expect to be invested in finding and producing hydrocarbons in the offshore segment.
See “– Contract Drilling Backlog” for future commitments of our rigs during the remainder of 2022 through 2025.
23
Contract Drilling Backlog
We believe that our contract drilling backlog provides a useful indicator of our future revenue-earning opportunities. Our contract drilling backlog, as presented below, includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period. The contract period is based on the number of stated days for fixed-term contracts or an estimated duration (in days) for contracts based on a fixed number of wells. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned may be different than the amounts and periods shown in the tables below due to various factors. Our utilization rates, which generally have been in the range of 92-98% during contracted periods, can be adversely impacted due to various operating factors including unscheduled repairs and maintenance, weather conditions, the effects of COVID-19 and other factors. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. Revenue is generally not earned during periods of downtime for regulatory surveys; however, certain contracts may provide for reduced revenue during the survey period. Changes in our contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts. In addition, under certain circumstances, our customers may seek to terminate or renegotiate our contracts, which could adversely affect our reported backlog.
The backlog information presented below does not, nor is it intended to, align with the disclosures regarding revenue expected to be recognized in the future related to unsatisfied performance obligations, which are presented in Note 2 “Revenue from Contracts with Customers” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Contract drilling backlog includes only future dayrate revenue as described above, while the disclosure in Note 2 “Revenue from Contracts with Customers” excludes dayrate revenue and reflects expected future revenue for mobilization, demobilization and capital modifications to our rigs, which are related to non-distinct promises within our signed contracts. See “– Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows.”
The following table reflects our contract drilling backlog as of October 1, 2022 (and does not include any contracts signed after October 1, 2022 but prior to the date of this report), January 1, 2022 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2021), and October 1, 2021 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021) (in millions).
|
|
October 1, |
|
|
January 1, |
|
|
October 1, |
|
|||
Contract Drilling Backlog |
|
$ |
1,596 |
|
|
$ |
1,191 |
|
|
$ |
1,034 |
|
24
The following table reflects the amount of revenue related to our contract drilling backlog by year as of October 1, 2022 (in millions).
|
For the Years Ending December 31, |
|
|||||||||||||
|
Total |
|
2022 (1) |
|
2023 |
|
2024 |
|
2025 |
|
|||||
Contract Drilling Backlog (2) |
$ |
1,596 |
|
$ |
206 |
|
$ |
948 |
|
$ |
419 |
|
$ |
23 |
|
The following table reflects the percentage of rig days per year committed as of October 1, 2022. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet, to total available days (number of rigs, including cold-stacked rigs, multiplied by the number of days in a particular year).
|
|
For the Years Ending December 31, |
|
|||||||||||||
|
|
2022 (1) |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
||||
Percentage of Rig Days Committed (2) |
|
|
79 |
% |
|
|
71 |
% |
|
|
28 |
% |
|
|
1 |
% |
Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows
COVID-19 Pandemic. The COVID-19 outbreak and efforts to mitigate the spread of the virus continue to adversely impact our business as a result of risks to the safety of our personnel, as well as travel restrictions that may continue to arise, challenging the ability to move personnel, equipment, supplies and service personnel to and from our drilling rigs. In response, we have adopted COVID-19 vaccination and testing requirements, as well as other health protocols designed to ensure the safety of our offshore personnel based on the regions in which our rigs are operating. In the current environment, we have been able to modify and/or eliminate many of our initial protocols implemented after the onset of the pandemic. We incurred incremental costs of approximately $0.4 million and $1.6 million related to the COVID-19 pandemic during the Successor quarters ended September 30, 2022 and June 30, 2022, respectively. We expect to incur similar types of costs during the remainder of 2022 but cannot predict the future financial impact of our response to the COVID-19 pandemic or its duration or potential effects in this fluid environment. As such, costs realized in the future may be more than projected, perhaps by a material amount.
25
Regulatory Surveys and Planned Downtime. We perform certain regulatory inspections, which we refer to as a special survey, that are due every five years for most of our rigs and an intermediate survey, which is performed every two-and-one-half years, for our North Sea rigs. Our operating income is negatively impacted when we perform these required regulatory surveys due to planned downtime during the inspection period. Our operating income is also reduced by planned downtime for upgrades, contract preparation and mobilization of rigs; however, in some cases, we may be compensated for all or a portion of this downtime. During the last quarter of 2022, we expect to incur approximately 154 days of planned downtime, including approximately 62 days for shipyard repairs and enhancements for the Ocean Endeavor and approximately 92 days in connection with the reactivation of the Ocean GreatWhite. During 2023, we expect to incur approximately 177 days of planned downtime, including approximately 109 days for a maintenance project to meet regulatory requirements for the Ocean Apex, approximately 45 days for the Ocean GreatWhite reactivation and contract preparation activities and approximately 23 days for the completion of the Ocean Endeavor shipyard work that commenced in 2022. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, repairs, contract preparation, rig mobilizations and other shipyard projects. See “ – Contract Drilling Backlog.”
Physical Damage and Marine Liability Insurance. We are self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico, as defined by the relevant insurance policy. If a named windstorm in the U.S. Gulf of Mexico causes significant damage to our rigs or equipment, it could have a material adverse effect on our financial condition, results of operations and cash flows. Under our current insurance policy, we carry physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of Mexico for which our deductible for physical damage is $10.0 million per occurrence. In addition, we currently carry loss-of-hire insurance on certain rigs to cover lost cash flow when a rig is damaged (other than when caused by named windstorms in the U.S. Gulf of Mexico) but have not purchased loss-of-hire insurance for our entire fleet.
In addition, we carry marine liability insurance covering certain legal liabilities, including coverage for certain personal injury claims, collisions, and wreck removals, and generally covering liabilities arising out of or relating to pollution and/or environmental risk. We believe that the policy limit for our marine liability insurance is within the range that is customary for companies of our size in the offshore drilling industry and is appropriate for our business. Under these marine liability policies, we self-insure $1.0 million to $5.0 million per occurrence, depending on jurisdiction, but up to $25.0 million for liabilities arising out of named windstorms in the U.S. Gulf of Mexico. Depending on the nature, severity, and frequency of claims that might arise during the policy year, if the aggregate level of claims exceeds certain thresholds, we may self-insure up to $100.0 million for each subsequent occurrence.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 1 “General Information” of our notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
26
Results of Operations
We have elected to present a comparison of our results of operations for the current quarter with that of the immediately preceding quarter, as permitted under Item 303(c)(2)(ii) of Regulation S-K. We believe this comparison is more useful in identifying business trends and provides a more meaningful analysis of our business as our results are largely driven by market changes rather than seasonal business activity. We continue to present the required comparison of current year-to-date results with the same period of the prior year.
Our operating results for contract drilling services are dependent on three primary metrics or key performance indicators: revenue-earning (or R-E) days, rig utilization and average daily revenue. We believe that R-E days provide a comparative measurement of the activity level of our fleet, rig utilization is an indicator of our ability to secure work for and the operational efficiency of our fleet and average daily revenue provides a comparative measure for our revenue-earning performance. We utilize these performance indicators in the review of our business and operating results and believe these are useful metrics for investors to utilize in evaluating our performance. The tables presented below include these three key performance indicators and other comparative data relating to our revenues and operating expenses for the respective periods (in thousands, except days, daily amounts and percentages) for the Successor nine-month period ended September 30, 2022, three-month periods ended September 30, 2022 and June 30, 2022 and the period from April 24, 2021 through September 30, 2021 and the Predecessor period from January 1, 2021 through April 23, 2021.
Results for the Three-Month Periods Ended September 30, 2022 and June 30, 2022
|
|
Successor |
|
|
|||||
|
|
Three Months Ended September 30, |
|
|
Three Months Ended June 30, |
|
|
||
|
|
2022 |
|
|
2022 |
|
|
||
REVENUE-EARNING DAYS (1) |
|
|
809 |
|
|
|
776 |
|
|
UTILIZATION (2) |
|
|
68 |
% |
|
|
57 |
% |
|
AVERAGE DAILY REVENUE (3) |
|
$ |
234,800 |
|
|
$ |
227,800 |
|
|
|
|
|
|
|
|
|
|
||
CONTRACT DRILLING REVENUE |
|
$ |
189,861 |
|
|
$ |
176,879 |
|
|
REVENUE RELATED TO REIMBURSABLE |
|
|
36,212 |
|
|
|
28,823 |
|
|
TOTAL REVENUES |
|
$ |
226,073 |
|
|
$ |
205,702 |
|
|
CONTRACT DRILLING EXPENSE, EXCLUDING |
|
$ |
155,567 |
|
|
$ |
142,150 |
|
|
REIMBURSABLE EXPENSES |
|
$ |
35,765 |
|
|
$ |
28,554 |
|
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
||
Contract drilling services, net |
|
$ |
34,294 |
|
|
$ |
34,729 |
|
|
Reimbursable expenses, net |
|
|
447 |
|
|
|
269 |
|
|
Depreciation |
|
|
(26,069 |
) |
|
|
(25,693 |
) |
|
General and administrative expense |
|
|
(16,320 |
) |
|
|
(19,753 |
) |
|
Gain on disposition of assets |
|
|
73 |
|
|
|
685 |
|
|
Total Operating Loss |
|
$ |
(7,575 |
) |
|
$ |
(9,763 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
||
Interest income |
|
|
11 |
|
|
|
— |
|
|
Interest expense, net of amounts capitalized |
|
|
(10,364 |
) |
|
|
(10,103 |
) |
|
Foreign currency transaction gain |
|
|
237 |
|
|
|
1,607 |
|
|
Other, net |
|
|
172 |
|
|
|
(47 |
) |
|
Loss before income tax benefit |
|
|
(17,519 |
) |
|
|
(18,306 |
) |
|
Income tax benefit (expense) |
|
|
23,029 |
|
|
|
(3,623 |
) |
|
NET INCOME (LOSS) |
|
$ |
5,510 |
|
|
$ |
(21,929 |
) |
|
27
Three Months Ended September 30, 2022 Compared to Three Months Ended June 30, 2022
Contract Drilling Revenue. Contract drilling revenue increased $13.0 million during the three months ended September 30, 2022 compared to the three months ended June 30, 2022, primarily due to a 33-day increase in R-E days ($7.4 million), combined with the effect of higher average daily revenue earned ($5.6 million). The increase in R-E days reflected incremental operating days for the Ocean BlackHawk, Ocean Apex and Ocean Patriot (99 R-E days), all of which operated under contract for most of the third quarter of 2022, compared to being warm stacked, in shipyard or mobilizing between contracts during the second quarter and fewer downtime days for repairs (14 incremental R-E days), primarily for the Auriga. The third quarter 2022 increase in R-E days was partially offset by fewer operating days for the Ocean Onyx, which completed its contract in mid-July 2022 and is warm stacked in Australia as of the day of this report (80 fewer days).
Average daily revenue earned during the third quarter of 2022 increased primarily due to a higher dayrate earned by the Ocean BlackHawk operating in Senegal, compared to a lower dayrate earned while contracted in the Gulf of Mexico during the second quarter of 2022. In addition, average daily revenue was favorably impacted by a higher dayrate earned by the Ocean Patriot as a result of a contract extension that commenced in the third quarter of 2022.
Revenue Related to Reimbursable Expenses. During the third quarter of 2022, we recognized gross reimbursable revenue and expenses of $36.2 million, including $23.4 million earned under the MMSA. Gross reimbursable revenue and expenses for the second quarter of 2022 were $28.8 million and included $11.6 million earned under the MMSA.
Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation increased $13.4 million during the three months ended September 30, 2022, compared to the three months ended June 30, 2022. The increase in contract drilling expense in the third quarter of 2022 was primarily attributable to higher costs associated with operation of the Ocean BlackHawk in Senegal ($9.5 million), incremental reactivation and mobilization costs for the Ocean GreatWhite in connection with its upcoming contract in 2023 ($2.3 million) and other costs ($1.6 million).
General and Administrative Expense. General and administrative expense for the third quarter of 2022 decreased $3.4 million compared to the second quarter of 2022, primarily due to the recognition of compensation expense in the second quarter of 2022 associated with the vesting of certain performance-based restricted stock awards granted in May 2021. Vesting of these awards was contingent upon the occurrence of certain events that were not deemed probable at the time of the award, and, consequently, no expense related to these awards was recognized until the second quarter of 2022 when certain of the market conditions were satisfied.
Income Tax Benefit. We estimate our annual effective tax rate (or AETR) for continuing operations in recording our interim quarterly income tax provision considering the various jurisdictions in which we operate. Discrete tax adjustments are excluded from the computation of the AETR and recorded in the quarter in which they occur.
We recorded a net income tax benefit of $23.0 million (131.45% effective tax rate) for the three months ended September 30, 2022. For the three months ended June 30, 2022, we recorded net income tax expense of $3.6 million (negative 19.8% effective tax rate). The higher effective tax rate for the third quarter of 2022 reflects changes in our domestic and international jurisdictional mix of estimated pre-tax income and losses for the period and the fact that we have not recognized an income tax benefit for losses in certain jurisdictions due to a valuation allowance, while recognizing income tax expense for jurisdictions with forecasted pre-tax income. Additionally, the variance in the effective tax rate reflects a $4.1 million benefit recognized in the third quarter of 2022 for remeasurement of unrecognized tax benefits due to expiring statutes of limitation and a $3.4 million benefit recognized in the third quarter in respect to both current taxes and the release of a valuation allowance on losses related to our U.S. operations.
28
Results for the Successor Nine-Month Period Ended September 30, 2022 and the Period from April 24, 2021 through September 30, 2021 and for the Predecessor Period from January 1, 2021 through April 23, 2021
|
|
Successor |
|
|
|
Predecessor |
|
||||||
|
|
Nine Months Ended |
|
|
Period from April 24, 2021 through |
|
|
|
Period From January 1, 2021 through |
|
|||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
|
April, 23, 2021 |
|
|||
REVENUE-EARNING DAYS |
|
|
2,253 |
|
|
|
1,372 |
|
|
|
|
724 |
|
UTILIZATION |
|
|
65 |
% |
|
|
71 |
% |
|
|
|
53 |
% |
AVERAGE DAILY REVENUE |
|
$ |
229,400 |
|
|
$ |
205,000 |
|
|
|
$ |
211,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
CONTRACT DRILLING REVENUE |
|
$ |
516,992 |
|
|
$ |
281,189 |
|
|
|
$ |
153,364 |
|
REVENUE RELATED TO REIMBURSABLE |
|
|
101,022 |
|
|
|
47,599 |
|
|
|
|
16,015 |
|
TOTAL REVENUES |
|
$ |
618,014 |
|
|
$ |
328,788 |
|
|
|
$ |
169,379 |
|
CONTRACT DRILLING EXPENSE, EXCLUDING |
|
$ |
442,619 |
|
|
$ |
225,892 |
|
|
|
$ |
181,626 |
|
REIMBURSABLE EXPENSES |
|
$ |
99,932 |
|
|
$ |
46,645 |
|
|
|
$ |
15,477 |
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|||
Contract drilling services, net |
|
$ |
74,373 |
|
|
$ |
55,297 |
|
|
|
$ |
(28,262 |
) |
Reimbursable expenses, net |
|
|
1,090 |
|
|
|
954 |
|
|
|
|
538 |
|
Depreciation |
|
|
(78,714 |
) |
|
|
(43,885 |
) |
|
|
|
(92,758 |
) |
General and administrative expense |
|
|
(52,805 |
) |
|
|
(37,193 |
) |
|
|
|
(15,036 |
) |
Impairment of assets |
|
|
— |
|
|
|
— |
|
|
|
|
(197,027 |
) |
Gain on disposition of assets |
|
|
4,802 |
|
|
|
943 |
|
|
|
|
5,486 |
|
Total Operating Loss |
|
$ |
(51,254 |
) |
|
$ |
(23,884 |
) |
|
|
$ |
(327,059 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|||
Interest income |
|
|
12 |
|
|
|
3 |
|
|
|
|
30 |
|
Interest expense, net of amounts capitalized |
|
|
(28,792 |
) |
|
|
(16,874 |
) |
|
|
|
(34,827 |
) |
Foreign currency transaction (loss) gain |
|
|
(285 |
) |
|
|
259 |
|
|
|
|
(172 |
) |
Reorganization items, net |
|
|
— |
|
|
|
(7,454 |
) |
|
|
|
(1,639,763 |
) |
Other, net |
|
|
1,487 |
|
|
|
10,692 |
|
|
|
|
398 |
|
Loss before income tax benefit (expense) |
|
|
(78,832 |
) |
|
|
(37,258 |
) |
|
|
|
(2,001,393 |
) |
Income tax benefit (expense) |
|
|
28,059 |
|
|
|
(15,217 |
) |
|
|
|
39,404 |
|
NET LOSS |
|
$ |
(50,773 |
) |
|
$ |
(52,475 |
) |
|
|
$ |
(1,961,989 |
) |
Nine Months Ended September30, 2022 (Successor) Compared to the Period from April 24, 2021 through September 30, 2021 (Successor) and the Period from January 1, 2021 through April 23, 2021 (Predecessor)
Contract Drilling Revenue. During the Successor nine-month period ended September 30, 2022, we earned contract drilling revenue of $517.0 million attributable to 2,253 R-E days and average daily revenue of $229,400. Total utilization for the period was 65%, reflecting downtime for the Ocean Endeavor and Ocean Patriot for repairs and inspections (200 days), planned downtime related to contract preparation activities for the Ocean Apex and Ocean BlackHawk (176 days) and non-productive time associated with four warm- or cold- stacked rigs (818 days).
The increase in average daily revenue for the Successor nine-month period ended September 30, 2022, compared to the Successor period from April 24, 2021 to September 30, 2021, was primarily due to higher recognition of capital upgrade revenue related to managed pressure drilling equipment for the Ocean BlackLion and the impact of the Ocean Onyx, Ocean Patriot and Ocean BlackHawk operating at higher dayrates during the first nine months of 2022 compared to rates earned during the Successor period in 2021. The Ocean BlackRhino completed pre-contract commencement work in June 2021 and began drilling operations in Senegal during the third quarter of 2021.
During the Successor period from April 24, 2021 to September 30, 2021, we earned contract drilling revenue of $281.2 million attributable to 1,372 R-E days and average daily revenue of $205,000. Total utilization for the period
29
was 71%, reflecting downtime for the Ocean BlackRhino and Ocean Courage for contract preparation work (132 days) and the Ocean Endeavor, Ocean Patriot and Ocean Onyx for repairs, inspection and mobilization (65 days), in addition to the non-productive time associated with warm- or cold- stacked rigs (320 days). The decline in average daily revenue reflects reduced amortization of deferred revenue due to the write off of such balances at the Effective Date in connection with fresh start accounting. Prior to fresh start accounting, such amounts were amortized into income over the respective contract terms.
During the Predecessor period from January 1, 2021 through April 23, 2021, we earned contract drilling revenue of $153.4 million attributable to 724 R-E days and average daily revenue of $211,800. Total utilization for the period was 53%. Six of our then contracted rigs operated at nearly full utilization for the period, while three rigs were preparing for upcoming contracts throughout most of the period. The Ocean Onyx commenced a new contract in February 2021 after its reactivation and contributed 61 R-E days to the period.
Contract Drilling Expense, Excluding Depreciation. During the Successor nine-month period ended September 30, 2022 (a 273-day period), contract drilling expense, excluding depreciation totaled $442.6 million, primarily comprised of payroll and benefits cost ($199.7 million), repairs, maintenance and inspection ($126.9 million), equipment rentals ($41.1 million), shorebase cost, insurance and overhead ($60.0 million), moving cost ($11.3 million) and catering ($15.2 million), partially offset by a reduction in other costs ($11.6 million). Increased payroll and benefits costs are partially attributable to a rig retention bonus implemented for certain of our drilling rigs in early 2022.
During the Successor period from April 24, 2021 through September 30, 2021 (a 160-day period), contract drilling expense, excluding depreciation totaled $225.9 million, comprised primarily of payroll and employees cost ($100.2 million), repairs, maintenance and inspection ($64.5 million), equipment rentals ($17.3 million), shorebase cost, insurance and overhead ($28.4 million), catering ($7.6 million), moving cost ($2.9 million) and other ($5.0 million).
During the Predecessor period from January 1, 2021 through April 23, 2021 (a 113-day period), contract drilling expense, excluding depreciation totaled $181.6 million and was primarily comprised of payroll and employees cost ($73.5 million), repairs, maintenance and inspection ($39.6 million), equipment rentals ($24.4 million), shorebase cost and overhead ($20.8 million), moving cost ($12.8 million) and other ($10.5 million).
30
Depreciation Expense. Depreciation expense for the Successor nine-month period ended September 30, 2022 and the period from April 24, 2021 through September 30, 2021 and the Predecessor period from January 1, 2021 through April 23, 2021 was $78.7 million, $43.9 million and $92.8 million, respectively. The decline in depreciation expense since the Effective Date was primarily due to the reduction in depreciable value of our rigs and equipment as a result of the fair value remeasurement of rigs and equipment in connection with the application of fresh start accounting and asset impairments recognized in the fourth quarter of 2021.
General and Administrative Expense. General and administrative expense for the Successor nine-month period ended September 30, 2022 and the period from April 24, 2021 through September 30, 2021 and Predecessor period from January 1, 2021 through April 23, 2021 was $52.8 million, $37.2 million and $15.0 million, respectively. Expenses incurred during the Successor nine months ended September 30, 2022 included payroll and benefits ($29.4 million), legal and professional fees ($16.5 million), office expenses ($6.0 million) and other ($0.8 million). For the Successor period from April 24, 2021 through September 30, 2021, general and administrative expense included payroll and benefits ($21.7 million), professional and legal fees ($11.8 million), office expenses ($3.4 million) and other ($0.3 million). Expenses incurred during the Predecessor period from January 1, 2021 through April 23, 2021 included payroll and benefits costs ($9.9 million), professional and legal fees ($3.6 million) and other ($1.5 million). Payroll and benefits costs for the Successor nine-month period ended September 30, 2022 included $5.4 million in incremental compensation expense associated with certain performance-based restricted stock awards granted in 2021.
Impairment of Assets. During the Predecessor period from January 1, 2021 through April 23, 2021, we recognized an impairment charge of $197.0 million to write down the carrying value of one of our rigs with indicators of impairment due to concerns at that time over future opportunities for the rig. See Note 3 “Impairment of Assets” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report.
Gain on Disposition of Assets. During the first quarter of 2022, we sold the Ocean Valor for aggregate proceeds of approximately $6.6 million and recognized a net gain on the transaction of $4.2 million.
Interest Expense. Interest expense for the Successor nine-month period ended September 30, 2022 included interest cost related to our exit financing ($19.2 million), imputed interest expense related to our equipment finance leases ($7.9 million), amortization of deferred arrangement fees associated with our exit credit facility ($1.5 million) and other ($0.2 million). Interest expense for the Successor period from April 24, 2021 through September 30, 2021 included interest on exit financing ($11.0 million), imputed interest on equipment finance leases ($5.0 million) and amortization of deferred debt arrangement fees ($0.9 million) .
Upon filing for bankruptcy protection on April 26, 2020, we ceased accruing interest expense on our then outstanding long-term indebtedness and borrowings outstanding under our previous credit facility. However, due to provisions in our plan of reorganization, we resumed recognizing interest on our outstanding borrowings under the previous credit facility and accrued interest expense of $34.8 million for the Predecessor period from January 1, 2021 to April 23, 2021, inclusive of a $23.4 million catch-up adjustment for the period from April 26, 2020 to December 31, 2020.
Income Tax Benefit. We recorded a net income tax benefit of $28.1 million (35.6% effective tax rate) for the nine months ended September 30, 2022, as compared to a net income tax benefit of $15.2 million (negative 40.8% effective tax rate) for the Successor period from April 23, 2021 to September 30, 2021. The higher effective tax rate for the nine months ended September 30, 2022 reflects changes in the domestic and international jurisdictional mix of our pre-tax income and losses. Additionally, the variance reflects a $5.4 million benefit recognized during the nine months ended September 30, 2022 for remeasurement of unrecognized tax benefits and other tax balances due to strengthening of the U.S. dollar relative to foreign currencies and a $3.4 million benefit recognized in September 2022 in respect to taxation of our U.S. operations.
For the Predecessor period from January 1, 2021 to April 23, 2021, we recorded an income tax benefit of $39.4 million (1.9% effective tax rate), which reflects certain consequences of the Predecessor’s bankruptcy filing. The higher effective tax rate for the period for the nine months ended September 30, 2022 also reflects changes in the domestic and international jurisdictional mix of our pre-tax income and loss, which are consequences, in part, of realigning substantially all our assets and operations under a foreign subsidiary in April 2021.
31
Liquidity and Capital Resources
We have available a senior secured revolving credit agreement (or the Exit Revolving Credit Agreement), which provides for a $400.0 million senior secured revolving credit facility and also originally provided for a $100.0 million sublimit for the issuance of letters of credit thereunder (or the Exit RCF). Effective September 30, 2022, as discussed below, the aggregate amount of the commitments of the Issuing Lenders (as defined in the Exit Revolving Credit Agreement) to issue letters of credit under the Exit RCF decreased to $75.0 million. Our total capacity for borrowings under the Exit RCF was not impacted by the resignation of the Issuing Lender and remains at $400 million. The Exit RCF is scheduled to mature on April 22, 2026.
On August 31, 2022, one of the Issuing Lenders in our Exit RCF (or the Resigning Lender) notified us that it was resigning as an Issuing Lender as of September 30, 2022. The Resigning Lender had provided a commitment to issue up to $25.0 million in letters of credit under the Exit RCF. The Resigning Lender will continue to have all the rights and obligations of an Issuing Lender under the Exit RCF with respect to letters of credit issued by it prior to its resignation but will not be required to issue additional letters of credit or extend, renew or increase the outstanding letters of credit. As a result, the aggregate amount of the commitments of the Issuing Lenders to issue letters of credit under the Exit RCF was reduced from $100.0 million to $75.0 million.
At November 7, 2022, we had borrowings of $152.5 million outstanding under the Exit RCF and had utilized $37.3 million for the issuance of letters of credit. As of November 7, 2022, approximately $213.7 million was available for borrowings or the issuance of letters of credit under the Exit RCF. However, the availability of borrowings and letters of credit under the Exit RCF is subject to the satisfaction of certain conditions as specified in the Exit Revolving Credit Agreement, including restrictions on borrowings.
We also have approximately $39.7 million in the form of delayed draw note commitments that may be issued as additional 9.00%/11.00%/13.00% Senior Secured First Lien PIK Toggle Notes due 2027 (or First Lien Notes), none which had been issued as of November 7, 2022.
Historically, we have relied on our cash flows from operations and cash reserves to meet our liquidity needs, which primarily include funding of our working capital requirements and capital expenditures, as well as the servicing of our debt repayments and interest payments. As of November 7, 2022, all of our rigs, excluding managed rigs, are owned and operated, directly or indirectly, by Diamond Foreign Asset Company (or DFAC). Our management has determined that we will permanently reinvest foreign earnings, which restricts the ability to utilize cash flows of DFAC on a company-wide basis. To the extent possible, we expect to utilize the operating cash flows and cash reserves of DFAC and the operating cash flows available to and cash reserves of Diamond Offshore Drilling, Inc. to meet each respective entity's working capital requirements and capital commitments.
As of October 1, 2022, our contractual backlog was approximately $1.6 billion. At September 30, 2022, we had cash available for current operations of $61.2 million, including $38.6 million that is subject to restrictions pursuant to the MMSA.
Sources and Uses of Cash
Historical Cash Flow from Operations
For the Successor nine-month period ended September 30, 2022, our operating activities used cash of $21.9 million. Cash expenditures for contract drilling, shorebase support, and general and administrative costs ($590.4 million) and cash income taxes paid, net of refunds ($15.0 million), were partially offset by cash receipts from contract drilling services ($566.0 million) during the nine-month period. In addition, collateral deposits aggregating $17.5 million were exchanged for letters of credit drawn under the Exit RCF, positively impacting cash flow but with a neutral effect on total liquidity.
Cash outlays for capital expenditures during the first nine months of 2022 aggregated $42.7 million (including capital outlays for the Ocean Endeavor and Ocean Patriot shipyard work earlier in the period). We also paid $11.8 million in finance lease obligations related to well control equipment on our owned drillships during the period. During
32
the first nine months of 2022, asset sales, including the sale of the Ocean Valor, generated cash proceeds of $5.9 million, and $69.0 million was borrowed under the Exit RCF.
For the Successor period from April 24, 2021 through September 30, 2021, our operating activities used $41.0 million. Cash expenditures for contract drilling, shorebase support and general and administrative costs ($348.9 million) and payments to professionals in connection with our bankruptcy cases ($35.4 million) more than offset cash receipts for contract drilling services ($338.4 million) for the period and funds from the return of certain collateral deposits ($4.9 million). Cash outlays for capital expenditures and finance lease obligations during the period aggregated $37.8 million and $6.0 million, respectively, and we had incremental borrowings of $20.0 million, net of repayments, under the Exit RCF.
For the Predecessor period from January 1, 2021 through April 23, 2021, our operating activities used $100.1 million. Cash expenditures for contract drilling, shorebase support and general and administrative costs ($243.9 million), payments to professionals in connection with our bankruptcy cases ($37.6 million), and net cash income taxes paid ($3.4 million) offset cash receipts for contract drilling services ($181.4 million) for the period. Cash outlays for capital expenditures aggregated $49.1 million for the period.
As set forth in our plan of reorganization, on the Effective Date, we settled $242.0 million outstanding under our previous credit facility in cash and issued $75.0 million of First Lien Notes.
Capital Expenditures, Rig Reactivation and Other Projects
As of the date of this report, we expect total cash capital expenditures for 2022 to be approximately $75.0 million to $80.0 million pursuant to our capital maintenance programs, including approximately $25.0 million in current year capital spending associated with reactivation of the Ocean GreatWhite and additional structural work for the Ocean Endeavor in the fourth quarter.
In total, we expect to incur approximately $35.0 million to $40.0 million in connection with reactivation and contract preparation activities for the Ocean GreatWhite, including both capital and non-capital work scopes. Approximately $18.0 million to $20.0 million of total work scopes is attributable to the reactivation portion of the project (including approximately $13 million in capital spending in the remainder of 2022 reported above), and approximately $17.0 million to $20.0 million is attributable to pre-commencement operating expenses, emissions reduction equipment, mobilization of the rig and customer-requested equipment and enhancements. In order to meet an accelerated commencement window, a significant portion of the preparation activities are scheduled to occur in the fourth quarter of 2022.
Other Obligations
As of September 30, 2022, the total net unrecognized tax benefits related to uncertain tax positions that could result in a future cash payment was $32.3 million. Due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities recognized in these balances, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.
Other Commercial Commitments - Letters of Credit
See Note 8 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of certain of our other commercial commitments.
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
33
or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “would,” “may,” “might,” “will,” “will be,” “will continue,” “will likely result,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects:
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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 in Item 1A, “Risk Factors” in Part II of this report and Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A.
The risks and uncertainties referenced above are not exhaustive. Other sections of this report and our other filings with the Securities and Exchange Commission include additional factors that could adversely affect our business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward-looking statement is based. In addition, in certain places in this report, we may refer to reports published by third parties that purport to describe trends or developments in energy production or drilling and exploration activity. While we believe that these reports are reliable, we have not independently verified the information included in such reports. We specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The information included in this Item 3 constitutes “forward-looking statements” for purposes of the statutory safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” in Item 2 of Part I of this report.
Interest Rate Risk. We have exposure to interest rate risk on our debt instruments arising from changes in the level or volatility of interest rates. As of September 30, 2022, our variable interest rate debt included $152.5 million of outstanding borrowings under the Exit RCF, $18.0 million for the issuance of letters of credit under the Exit RCF
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and $100.0 million outstanding under our senior secured term loan agreement we entered into on the Effective Date. At this level of variable-rate debt, the impact of a 100-basis point increase in market interest rates would not have a material effect (estimated $2.7 million increase in interest expense on an annualized basis). Our First Lien Notes have been issued at fixed rates, and as such, interest expense would not be impacted by interest rate shifts.
There were no other material changes in our market risk components for the nine months ended September 30, 2022. See “Quantitative and Qualitative Disclosures About Market Risk” included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A, for further information.
ITEM 4. Controls and Procedures.
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the federal securities laws, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us under the federal securities laws is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure.
Our Chief Executive Officer (or CEO) and Chief Financial Officer (or CFO) participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2022. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2022.
There were no changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during our third fiscal quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Information related to certain legal proceedings is included in Note 8 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report, which is incorporated herein by reference.
ITEM 1A. Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A, includes a detailed discussion of certain material risk factors facing the Company. The additional risk factors presented below describe additional risks and should be read in conjunction with Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A, which are incorporated herein by reference.
Risks Related to Our Business and Operations
Inflation may adversely affect our operating results and increase working capital investments required to operate our business.
Inflationary factors such as increases in labor costs, material costs and overhead costs may adversely affect our operating results. Inflationary pressures may also increase other costs to operate or reactivate our drilling rigs. Our contracts for our drilling rigs generally provide for the payment of an agreed dayrate per rig operating day. Although some contracts do provide for a limited escalation in dayrate due to increased operating costs we incur on the project, we may not be able to fully recover increased costs due to inflation from our customers. If we are unable to recoup such increased costs, our operating margins will decline. Continuing or worsening inflation could significantly increase our operating expenses and capital expenditures, which could in turn have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Items 2(a) and 2(b) are not applicable.
(c) During the three months ended September 30, 2022, in connection with the vesting of shares of restricted stock held by our Chief Executive Officer, which were awarded under an equity incentive compensation plan, we acquired shares of our common stock in satisfaction of tax withholding obligations that were incurred in connection with such vesting. The date of acquisition, number of shares and average effective acquisition price per share were as follows:
Issuer Purchases of Equity Securities
Period |
Total Number of Shares Acquired |
|
Average Price Paid per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||
July 1, 2022 through July 31, 2022 |
|
144,845 |
|
$ |
6.09 |
|
N/A |
N/A |
August 1, 2022 through August 31, 2022 |
|
301,300 |
|
|
7.28 |
|
N/A |
N/A |
September 1, 2022 through September 30, 2022 |
|
— |
|
|
— |
|
N/A |
N/A |
Total |
|
446,145 |
|
$ |
6.89 |
|
N/A |
N/A |
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ITEM 6. Exhibits.
Exhibit No. |
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Description of Exhibit |
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3.1 |
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3.2 |
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31.1* |
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Rule 13a-14(a) Certification of the Chief Executive Officer. |
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31.2* |
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Rule 13a-14(a) Certification of the Chief Financial Officer. |
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32.1* |
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Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
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101.INS* |
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Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
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Inline XBRL Taxonomy Calculation Linkbase Document. |
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101.LAB* |
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Inline XBRL Taxonomy Label Linkbase Document. |
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101.PRE* |
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Inline XBRL Presentation Linkbase Document. |
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101.DEF* |
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Inline XBRL Definition Linkbase Document. |
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104* |
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The cover page of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included with the Exhibit 101 attachments). |
* Filed or furnished herewith.
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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.
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DIAMOND OFFSHORE DRILLING, INC. |
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(Registrant) |
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Date November 8, 2022 |
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By: |
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/s/ Dominic A. Savarino |
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Dominic A. Savarino |
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Senior Vice President and Chief Financial Officer |
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Exhibit 31.1
I, Bernie Wolford, Jr., certify that:
Date: November 8, 2022
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/s/ Bernie Wolford, Jr. |
Bernie Wolford, Jr. |
President and Chief Executive Officer |
Exhibit 31.2
I, Dominic A. Savarino, certify that:
Date: November 8, 2022
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/s/ Dominic A. Savarino |
Dominic A. Savarino |
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350, in his capacity as an officer of Diamond Offshore Drilling, Inc. (the “ Company ”), that, to his knowledge:
(1) the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “ Report ”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 8, 2022
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/s/ Bernie Wolford, Jr. |
Bernie Wolford, Jr. |
President and Chief Executive Officer of the Company |
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/s/ Dominic A. Savarino |
Dominic A. Savarino |
Chief Financial Officer of the Company |