SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1996 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to _______________ Commission File Number 1-8097 ENSCO INTERNATIONAL INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 76-0232579 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2700 Fountain Place 1445 Ross Avenue, Dallas Texas 75202 - 2792 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 922-1500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] There were 70,774,762 shares of Common Stock, $.10 par value, of the registrant outstanding as of July 29, 1996.
ENSCO INTERNATIONAL INCORPORATED INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 PAGE -------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheet June 30, 1996 and December 31, 1995 3 Consolidated Statement of Income Three Months Ended June 30, 1996 and 1995 4 Consolidated Statement of Income Six Months Ended June 30, 1996 and 1995 5 Consolidated Statement of Cash Flows Six Months Ended June 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 - 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 - 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 21
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, 1996 1995 ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents..................... $ 76,743 $ 77,064 Short-term investments........................ - 5,000 Accounts and notes receivable, net............ 97,033 60,796 Prepaid expenses and other.................... 27,137 22,893 Total current assets.................... 200,913 165,753 PROPERTY AND EQUIPMENT, AT COST................. 1,153,187 818,266 Less accumulated depreciation................. 218,982 185,334 Property and equipment, net............. 934,205 632,932 OTHER ASSETS Goodwill...................................... 96,906 7,252 Other......................................... 9,838 15,514 Total other assets 106,744 22,766 $1,241,862 $821,451 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.............................. $ 12,811 $ 8,936 Accrued liabilities........................... 56,496 45,820 Current maturities of long-term debt.......... 33,857 32,052 Total current liabilities............... 103,164 86,808 LONG-TERM DEBT.................................. 272,988 159,201 DEFERRED INCOME TAXES........................... 47,348 26,800 OTHER LIABILITIES............................... 31,250 17,393 STOCKHOLDERS' EQUITY Common stock, $.10 par value, 125.0 million shares authorized, 77.1 million and 66.9 million shares issued....................... 7,706 6,689 Additional paid-in capital.................... 834,575 615,644 Retained earnings (deficit)................... 12,673 (23,598) Restricted stock (unearned compensation)...... (5,509) (5,263) Cumulative translation adjustment............. (1,086) (1,086) Treasury stock at cost, 6.3 million shares.... (61,247) (61,137) Total stockholders' equity ............. 787,112 531,249 $1,241,862 $821,451 The accompanying notes are an integral part of these financial statements.
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) THREE MONTHS ENDED JUNE 30, ---------------------- 1996 1995 -------- -------- (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING REVENUES........................... $ 97,249 $ 62,425 OPERATING EXPENSES Operating costs............................ 49,227 36,164 Depreciation and amortization.............. 17,880 14,307 General and administrative................. 2,950 2,478 70,057 52,949 OPERATING INCOME............................. 27,192 9,476 OTHER INCOME (EXPENSE) Interest income............................ 1,098 1,652 Interest expense........................... (4,387) (4,104) Other, net................................. 7,458 400 4,169 (2,052) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST......... 31,361 7,424 Provision for (benefit from) income taxes Current income taxes..................... 594 (855) Deferred income taxes.................... 8,255 1,000 8,849 145 Minority interest.......................... 931 596 INCOME FROM CONTINUING OPERATIONS............ 21,581 6,683 Income from discontinued operation......... - 401 NET INCOME .................................. $ 21,581 $ 7,084 EARNINGS PER SHARE Continuing operations...................... $ .34 $ .11 Discontinued operation..................... - .01 $ .34 $ .12 WEIGHTED AVERAGE SHARES OUTSTANDING.......... 62,788 60,389 The accompanying notes are an integral part of these financial statements.
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) SIX MONTHS ENDED JUNE 30, ---------------------- 1996 1995 -------- -------- (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING REVENUES........................... $181,795 $123,555 OPERATING EXPENSES Operating costs............................ 92,751 72,259 Depreciation and amortization.............. 34,254 27,853 General and administrative................. 5,165 4,621 132,170 104,733 OPERATING INCOME............................. 49,625 18,822 OTHER INCOME (EXPENSE) Interest income............................ 2,334 3,801 Interest expense........................... (8,436) (8,495) Other, net................................. 7,722 1,343 1,620 (3,351) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST......... 51,245 15,471 Provision for (benefit from) income taxes Current income taxes..................... 961 (357) Deferred income taxes.................... 12,655 541 13,616 184 Minority interest.......................... 1,358 1,198 INCOME FROM CONTINUING OPERATIONS............ 36,271 14,089 Income from discontinued operation......... - 617 NET INCOME .................................. $ 36,271 $ 14,706 EARNINGS PER SHARE Continuing operations...................... $ .59 $ .23 Discontinued operation..................... - .01 $ .59 $ .24 WEIGHTED AVERAGE SHARES OUTSTANDING.......... 61,719 60,518 The accompanying notes are an integral part of these financial statements.
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) SIX MONTHS ENDED JUNE 30, ------------------- 1996 1995 -------- -------- (RESTATED) (IN THOUSANDS) OPERATING ACTIVITIES Net income........................................ $ 36,271 $ 14,706 Adjustments to reconcile net income to net cash provided by operating activities: Net cash provided by discontinued operation.. - 657 Depreciation and amortization................ 34,254 27,853 Deferred income tax provision................ 12,655 541 Amortization of other assets................. 1,646 1,787 Other........................................ (2,104) (1,024) Changes in operating assets and liabilities: Increase in accounts receivable............ (8,881) (12,539) Decrease in prepaid expenses and other..... 2,566 8,914 Increase in accounts payable............... 2,228 5,375 Increase (decrease) in accrued liabilities. 5,312 (2,557) Net cash provided by operating activities........................... 83,947 43,713 INVESTING ACTIVITIES Additions to property and equipment............... (69,289) (67,075) Purchase of long-term investments................. (18,112) - Sale of short-term investments.................... 5,000 2,879 Net cash acquired in Dual acquisition............. 8,529 - Other............................................. 1,495 (3,212) Net cash used by investing activities......... (72,377) (67,408) FINANCING ACTIVITIES Proceeds from long-term borrowings................ 45,000 - Reduction of long-term borrowings................. (57,590) (19,851) Repurchase of common stock........................ - (7,210) Other............................................. 699 157 Net cash used by financing activities........... (11,891) (26,904) DECREASE IN CASH AND CASH EQUIVALENTS............... (321) (50,599) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 77,064 147,851 CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 76,743 $ 97,252 The accompanying notes are an integral part of these financial statements.
ENSCO INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Unaudited Financial Statements - --------------------------------------- The consolidated financial statements included herein have been prepared by ENSCO International Incorporated (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with generally accepted accounting principles and, in the opinion of management, reflect all adjustments (which consist of normal recurring adjustments) which are necessary for a fair statement of the results of operations for the interim periods presented. On June 12, 1996, the Company acquired DUAL DRILLING COMPANY ("Dual"). See "Note 2 - Acquisition" below. The Company's consolidated financial statements include the results of Dual from the June 12, 1996 acquisition date. It is recommended that these statements be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1995 included in the Company's Annual Report to the Securities and Exchange Commission on Form 10-K. As a result of the sale of the Company's technical services business effective September 30, 1995, the Company's 1995 Consolidated Statements of Income and of Cash Flows presented herein have been reclassified to present the Company's technical services operations as a discontinued operation. Note 2 - Acquisition - -------------------- On June 12, 1996, the Company acquired Dual pursuant to an Agreement and Plan of Merger among the Company, DDC Acquisition Company and Dual (the "Merger Agreement") approved by Dual stockholders on that date. Under the terms of the Merger Agreement, each share of Dual common stock was immediately converted into the right to receive 0.625 shares of the Company's common stock. The Company issued approximately 10.1 million shares of its common stock to the previous Dual stockholders in connection with the acquisition of Dual. The Company accounted for the acquisition of Dual as a purchase acquisition. The purchase price allocation has been based on preliminary estimates of fair value and is subject to adjustment as additional information becomes available and is evaluated. The primary areas subject to further purchase price adjustment are reserves associated with insurance related matters and taxes. The acquired Dual operations consist of a fleet of 20 offshore drilling rigs, including 10 jackup rigs and 10 platform rigs. Five of Dual's jackup rigs are located in the Gulf of Mexico and the remaining five jackup rigs are located offshore Indonesia, India and Qatar. Of the 10 platform rigs operated by Dual, seven are currently located in the Gulf of Mexico, two are located off the coast of California and one is located off the coast of China.
The following unaudited pro forma information shows the consolidated results of operations for the six months ended June 30, 1996 and 1995 based upon adjustments to the restated historical financial statements of the Company and the historical financial statements of Dual to give effect to the acquisition by the Company as if such acquisition had occurred January 1, 1995 (in thousands, except per share data): 1996 1995 -------- -------- Operating revenues $235,337 $169,653 Operating income $ 52,700 $ 17,406 Income from continuing operations $ 34,773 $ 7,232 Net income $ 34,773 $ 7,849 Earnings per share $ 0.48 $ 0.11 The pro forma consolidated results of operations are not necessarily indicative of the actual results that would have occurred had the acquisition occurred on January 1, 1995, or of results that may occur in the future. Note 3 - Gain on Settlement - --------------------------- In February 1991, a subsidiary of the Company filed an action against TransAmerican Natural Gas Corporation and related subsidiaries and affiliates ("TransAmerican") seeking damages for breach of contract. On April 5, 1996, the U.S. District court for the Southern District of Texas, Houston Division, entered a judgment against TransAmerican. As a result of the judgment, on April 18, 1996, the subsidiary of the Company entered into a settlement agreement with TransAmerican. Under the terms of the settlement agreement, the subsidiary of the Company received approximately $7.3 million. In the second quarter of 1996, the Company recorded a gain of $6.4 million under the caption "Other, net" with a corresponding increase in deferred income tax expense of $2.2 million for an after tax gain of $4.2 million. Note 4 - Long-Term Debt - ----------------------- On June 13, 1996, the Company amended its $130.0 million revolving credit facility with a group of international banks, increasing availability under the revolving credit facility to $150.0 million ("facility"). On the same date, the Company borrowed an additional $45.0 million under the facility, increasing outstanding borrowings under the facility to $111.0 million. Proceeds from the additional $45.0 million of borrowings under the facility were used to refinance approximately $41.8 million of Dual's long-term debt. Availability under the facility is reduced by $7.0 million on a semi-annual basis commencing in October 1996, with the remaining outstanding balance due in October 2001. The facility continues to be collateralized by the majority of the Company's jackup rigs, including certain of the jackup rigs acquired in the acquisition of Dual. The covenants under the facility are similar to the covenants that existed under the original revolving credit facility and the interest rate continues to be tied to London InterBank Offered Rates. As of June 30, 1996, the interest rate on the facility was 7.1%.
At June 30, 1996, Dual had outstanding $100.0 million (face amount) of 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"). As of June 30, 1996, the Company had purchased $17.3 million (face amount) of the 9 7/8 % Notes on the open market. The Company's balance sheet at June 30, 1996 reflects long-term debt net of the $17.3 million (face amount) of 9 7/8% Notes purchased by the Company. In mid-July 1996, the Company purchased an additional $3.8 million (face amount) of the 9 7/8% Notes on the open market. Additionally, in mid-July 1996 $5.0 million (face amount) of the 9 7/8% Notes were redeemed pursuant to an offer by Dual to purchase the 9 7/8% Notes following a change in control. Note 5 - Provision for Income Taxes - ----------------------------------- The current income tax provisions for the three and six months ended June 30, 1996 are primarily for United States alternative minimum taxes and the Company's operations in Venezuela and the Netherlands. The deferred income tax provisions for the three and six months ended June 30, 1996 relate to the Company's operations in the U.S., the United Kingdom and Venezuela. No provision for regular U.S. federal income taxes has been recorded for the three and six months ended June 30, 1996 due to the utilization of net operating loss carryforwards to offset taxes currently payable. At June 30, 1996, the Company had regular and alternative minimum tax net operating loss carryforwards of approximately $264.7 million and $140.8 million, respectively, and investment tax credit and alternative minimum tax credit carryforwards of approximately $360,000 and $1.5 million, respectively. Note 6 - Commitments and Contingencies - -------------------------------------- In mid-January 1996, one of the Company's jackup rigs located in the Gulf of Mexico experienced damage as it was preparing to jack up on a new location. The jackup rig was mobilized to a shipyard where it is currently undergoing repairs and is expected to be available for work in late 1996. The Company is fully insured for damage to and salvage operations related to the jackup rig and the Company expects that all such costs incurred will be recoverable from its insurance coverage. As of June 30, 1996, the Company had a receivable recorded from its insurance carrier of approximately $2.6 million related to damage to and salvage operations related to the rig. Note 7 - Subsequent Events - -------------------------- The Company sold substantially all of the assets of its technical services business in 1995. The consideration received by the Company in the sale consisted of $11.8 million in cash and two notes from the purchaser ("Purchaser") totalling $6.1 million. The notes consisted of a $3.6 million promissory note and a $2.5 million convertible promissory note. In early July 1996, the Purchaser completed an initial public offering of its common stock ("Purchaser's IPO"). In connection with the Purchaser's IPO, the $ 3.6 million promissory note was paid in full and the $2.5 million convertible promissory note was converted into common stock of the Purchaser. The Purchaser's common stock received by the Company in connection with the conversion of the $2.5 million convertible promissory
note was sold for $5.4 million in the Purchaser's IPO. The Company will record a gain of approximately $2.9 million, exclusive of taxes, in the third quarter of 1996 associated with the sale of the Purchaser's common stock received by the Company from conversion of the $2.5 million convertible promissory note. In mid-July 1996, the Company sold its remaining land rig, which was located in the Middle East, for $2.5 million. The Company will record a gain of approximately $750,000, exclusive of income taxes, in the third quarter of 1996 associated with the sale of the rig.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS ENVIRONMENT ENSCO International Incorporated (the "Company") provides offshore contract drilling and marine transportation services to the oil and gas industry. The Company's contract drilling operations are primarily conducted in the Gulf of Mexico, the North Sea, Venezuela and Asia. The marine transportation services provided by the Company are currently conducted solely in the Gulf of Mexico. Industry activity levels for offshore drilling rigs and Gulf of Mexico marine vessels have increased in the first half of 1996 over the already improved levels prevalent in the second half of 1995. The increased activity levels in 1996 have resulted in demand sufficient to absorb almost all of the rigs that are in working condition and being actively marketed in the major offshore oil and gas markets throughout the world and for Gulf of Mexico marine vessels that are in working condition and being actively marketed. Industry activity levels for Gulf of Mexico drilling rigs have consistently increased since mid-1995. Management believes current Gulf of Mexico industry activity levels are sustainable for the remainder of 1996 unless there is a significant and unexpected deterioration in natural gas prices. In particular, demand for cantilever jackup rigs, which is the Company's main focus, is expected to remain strong due to the increased level of development activity which requires cantilevered drilling over existing production platforms. Activity levels for the Company's marine transportation vessels generally correspond with activity levels experienced for the Company's Gulf of Mexico rigs. In the North Sea, industry activity levels increased in the first half of 1996 with full utilization of all actively marketed jackup rigs as compared to near full utilization in the second half of 1995. During 1996, reduced industry activity levels in the British sector of the North Sea (due to lower natural gas prices in the United Kingdom) have been offset by higher activity levels in other sectors of the North Sea, particularly Holland. Further decreases in United Kingdom natural gas prices and related activity levels in the British sector of the North Sea without an offsetting increase in activity levels in other sectors of the North Sea could adversely impact the overall North Sea market. In Asia, during the first half of 1996, demand for offshore drilling rigs has increased while the supply of actively marketed offshore drilling rigs has continued to fall. Management anticipates that activity levels for offshore drilling rigs in Asia should remain fairly stable for the remainder of 1996 unless there is a significant deterioration in oil prices. The Company's barge drilling rigs in Venezuela generally operate under long-term contracts for a national oil company. As a result, their activity levels are not as dependent on oil prices.
Offshore rig and marine vessel industry utilization for the three and six months ended June 30, 1996 and 1995 are summarized below: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ INDUSTRY WIDE AVERAGES * Offshore Rigs U.S. Gulf of Mexico: Jackup Rigs: Rigs Under Contract 121 104 118 100 Total Rigs Available 137 142 137 141 % Utilization 88% 73% 86% 71% Platform Rigs: Rigs Under Contract 18 9 16 10 Total Rigs Available 26 26 25 26 % Utilization 69% 35% 63% 37% Worldwide: Jackup Rigs: Rigs Under Contract 346 319 340 315 Total Rigs Available 384 389 384 390 % Utilization 90% 82% 89% 81% Platform Rigs: Rigs Under Contract 90 86 86 88 Total Rigs Available 122 137 118 133 % Utilization 74% 63% 73% 66% Marine Vessels U.S. Gulf of Mexico: Vessels Under Contract 258 246 263 240 Total Vessels Available 278 277 280 277 % Utilization 93% 89% 94% 87% * Industry utilization based on data published by OFFSHORE DATA SERVICES, INC. RESULTS OF OPERATIONS On June 12, 1996, the Company acquired DUAL DRILLING COMPANY ("Dual") in a purchase acquisition. The Company's consolidated financial statements include the results of Dual from the June 12, 1996 acquisition date. The acquired Dual operations consist of a fleet of 20 offshore drilling rigs, including 10 jackup rigs and 10 platform rigs. Five of Dual's jackup rigs are located in the Gulf of Mexico and the remaining five jackup rigs are located offshore Indonesia, India and Qatar. Of the 10 platform rigs operated by Dual, seven are currently located in the Gulf of Mexico, two are located off the coast of California and one, which is not owned but managed by Dual, is located off the coast of China. The following analysis highlights the Company's operating results for the three and six months ended June 30, 1996 and 1995 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- OPERATING RESULTS Revenues $ 97,249 $ 62,425 $181,795 $123,555 Operating margin (1) 48,022 26,261 89,044 51,296 Operating income 27,192 9,476 49,625 18,822 Other income (expense) 4,169 (2,052) 1,620 (3,351) Provision for income taxes (8,849) (145) (13,616) (184) Minority interest (931) (596) (1,358) (1,198) Income from continuing operations 21,581 6,683 36,271 14,089 Income from discontinued operation - 401 - 617 Net income 21,581 7,084 36,271 14,706 REVENUES Contract drilling Gulf of Mexico jackup rigs $ 41,279 $ 26,172 $ 77,332 $ 53,894 North Sea jackup rigs 19,824 12,128 40,746 22,809 Asia jackup rigs 1,933 - 1,933 - Total jackup rigs 63,036 38,300 120,011 76,703 Barge drilling rigs 19,179 15,649 35,087 31,146 Platform rigs 1,421 - 1,421 - Dormant operations (2) 38 - 38 - Total contract drilling 83,674 53,949 156,557 107,849 Marine transportation AHTS (3) 3,852 3,382 7,630 6,175 Supply 7,811 4,357 14,406 8,289 Mini-supply 1,912 737 3,202 1,242 Total marine transportation 13,575 8,476 25,238 15,706 Total $ 97,249 $ 62,425 $181,795 $123,555 OPERATING MARGIN (1) Contract drilling Gulf of Mexico jackup rigs $ 20,305 $ 8,723 $ 36,459 $ 19,004 North Sea jackup rigs 6,592 4,913 16,021 8,433 Asia jackup rigs 690 - 690 - Total jackup rigs 27,587 13,636 53,170 27,437 Barge drilling rigs 13,119 9,920 23,113 19,654 Platform rigs 472 - 472 - Dormant operations (2) 22 (65) (9) (179) Total contract drilling 41,200 23,491 76,746 46,912 Marine transportation AHTS (3) 1,827 1,488 4,004 2,573 Supply 3,988 1,224 6,889 1,769 Mini-supply 1,007 58 1,405 42 Total marine transportation 6,822 2,770 12,298 4,384 Total $ 48,022 $ 26,261 $ 89,044 $ 51,296 (1) Defined as revenues less operating expenses, exclusive of depreci- ation and general and administrative expenses. (2) The Company has a management contract on a non-owned platform rig off the coast of China and owned one land rig in the Middle East, both of which were inactive. The land rig was sold in mid-July 1996.
(3) Anchor handling tug supply vessels. The following is an analysis of certain operating information of the Company for the three and six months ended June 30, 1996 and 1995: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- CONTRACT DRILLING Utilization: Gulf of Mexico jackup rigs 91% 84% 91% 86% North Sea jackup rigs 78% 57% 86% 59% Asia jackup rigs 86% - 86% - Total jackup rigs 88% 78% 89% 80% Barge drilling rigs 85% 87% 82% 93% Platform rigs 78% - 78% - Total 87% 81% 87% 84% Average day rates: Gulf of Mexico jackup rigs $ 25,825 $ 19,139 $ 24,631 $ 19,571 North Sea jackup rigs 45,522 43,410 44,375 41,269 Asia jackup rigs 24,772 - 24,772 - Total jackup rigs 29,640 23,205 28,821 23,216 Barge drilling rigs 24,768 19,717 23,327 18,542 Platform rigs 15,074 - 15,074 - Total $ 27,879 $ 22,028 $ 27,106 $ 21,595 MARINE TRANSPORTATION Utilization: AHTS * 72% 87% 80% 78% Supply 90% 79% 90% 75% Mini-supply 95% 57% 80% 49% Total 88% 75% 86% 70% Average day rates: AHTS * $ 9,767 $ 7,124 $ 8,713 $ 7,069 Supply 4,142 2,897 3,840 2,887 Mini-supply 2,766 1,786 2,730 1,757 Total $ 4,568 $ 3,543 $ 4,351 $ 3,511 * Anchor handling tug supply vessels. The Company's consolidated revenues, operating margin and operating income (defined as revenues less operating expenses, depreciation and general and administrative expenses) for the three and six months ended June 30, 1996 increased significantly from the same periods in 1995. The increases were due primarily to increased average day rates and utilization for the Company's rigs and vessels in 1996 and the return to work of various rigs and vessels that were in shipyards for major modifications and enhancements in the prior year periods.
Contract Drilling - ----------------- The following is an analysis of the Company's offshore drilling rigs at June 30, 1996 and 1995: 1996 1995 ------ ------ Jackup rigs: Gulf of Mexico 23 18 North Sea 6 6 Asia 5 (1) - Total jackup rigs 34 24 Barge rigs - Venezuela 10 10 Platform rigs 10 (2) - Total 54 34 (1) Includes one jackup rig operated by the Company that is 49% owned. (2) Seven are located in the Gulf of Mexico, two off the coast of California and one is not owned but is operated under a management contract off the coast of China. Revenues and operating margins for the Company's contract drilling segment for the three months ended June 30, 1996 were up 55% and 75%, respectively, and for the six months ended June 30, 1996 were up 45% and 64%, respectively, compared to the prior year periods. The significantly improved 1996 results were primarily due to increased current year activity levels in the Gulf of Mexico and the North Sea. Average day rates for the three and six months ended June 30, 1996 on the Company's jackup rigs in the Gulf of Mexico increased by 35% and 26%, respectively, and average day rates on the Company's North Sea jackup rigs increased by 5% and 8%, respectively, as compared to the prior year periods. The 1996 results also benefitted from the return to work of three of the Company's jackup rigs, two in the North Sea and one in the Gulf of Mexico, that were undergoing major modifications and enhancements in the prior year periods. The increased revenue and operating margin levels in 1996 were also due to payments received in 1996 on the Venezuela barge drilling rigs related to the recovery of past cost increases and the contribution from the rigs acquired from Dual. The above increases in revenue and operating margin were partially offset by two barge drilling rigs in Venezuela coming off contract in the second quarter of 1995. One of the barge drilling rigs returned to work in mid- May 1996 and the other in early-July 1996 under new long-term contracts with Lagoven S.A. ("Lagoven"), a subsidiary of the Venezuela national oil company. The Venezuelan currency experienced significant devaluation in the first half of 1994 and the Venezuelan government established policies to control the exchange rate of the Venezuelan currency and severely restricted the conversion of Venezuelan currency to U.S. dollars. The Venezuelan government further devalued the Venezuela currency against the U.S. dollar in late 1995. In April 1996, the Venezuela government removed all
conversion and exchange controls and the Venezuelan currency began trading freely. To date, the Company has not experienced problems associated with receiving U.S. dollar payments with respect to the U.S. dollar portion of its contracts with Lagoven. Changes in these conditions, other policy enactments, or political developments in Venezuela could have an adverse effect upon the Company. However, the Company believes such adverse effects are unlikely due to the volume of U.S. dollars paid to the parent company of Lagoven for its oil exports. Marine Transportation - --------------------- The following is an analysis of the Company's marine transportation vessels as of June 30, 1996 and 1995: 1996 1995 ---- ---- AHTS * 6 6 Supply 23 21 Mini-Supply 8 8 Total 37 35 * Anchor handling tug supply vessels. Revenues and operating margins for the Company's marine transportation segment for the three months ended June 30, 1996 were up 60% and 146%, respectively, and for the six months ended June 30, 1996 were up 61% and 181%, respectively, in comparison to the prior year periods. The 1996 results improved significantly from the prior year periods due to increased current year activity levels in the Gulf of Mexico. Average day rates for the Company's marine transportation vessels for the three and six months ended June 30, 1996 increased by 29% and 24% from the prior year periods. The 1996 results also benefitted from the return to work in mid-1995 of four mini-supply vessels that were undergoing modifications in the prior year periods and the purchase of six supply vessels in late-1995, four of which were previously operated under operating lease agreements. Depreciation and Amortization - ----------------------------- Depreciation and amortization expense increased by 25% and 23% for the three and six months ended June 30, 1996, respectively, as compared to the prior year periods due primarily to depreciation associated with major modifications and enhancements on various rigs and vessels that returned to work in 1995 and 1996, the addition of a North Sea jackup rig in March 1995 and depreciation on six supply vessels purchased in late 1995. Depreciation and amortization expense also increased in 1996 due to depreciation and amortization associated with the rigs acquired from Dual.
Other Income (Expense) - ---------------------- Other income (expense) for the three and six months ended June 30, 1996 and 1995 was as follows (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Interest income $ 1,098 $ 1,652 $ 2,334 $ 3,801 Interest expense (4,387) (4,104) (8,436) (8,495) Other, net 7,458 400 7,722 1,343 -------- -------- -------- -------- $ 4,169 $(2,052) $ 1,620 $(3,351) The Company's interest income decreased for the three and six months ended June 30, 1996 as compared to the prior year periods due primarily to lower average cash balances in the current year periods. "Other, net" increased for the three and six months ended June 30, 1996 as compared to the prior year periods due primarily to a $6.4 million gain on settlement with TransAmerican Natural Gas Corporation in the second quarter of 1996 as discussed in "Note 3 - Gain on Settlement" to the Company's Consolidated Financial Statements. Provision for Income Taxes - -------------------------- The Company's provisions for income taxes increased significantly for the three and six months ended June 30, 1996 as compared to the prior year periods due primarily to increased deferred income tax provisions in the current year periods. The Company's U.S. deferred income tax provisions for the three and six months ended June 30, 1996 increased by $6.4 million and $8.3 million, respectively, from the prior year periods due primarily to the timing of the recognition of the expected utilization or expiration of U.S. net operating loss carryforwards. The deferred income tax provisions in the U.S., Venezuela and the United Kingdom also increased for the three and six months ended June 30, 1996 as compared to the prior year periods due, in part, to increased differences in the book and tax basis of property and equipment as the Company's asset additions and enhancements have increased the difference between the book and tax basis of the Company's property and equipment. LIQUIDITY AND CAPITAL RESOURCES Cash Flow and Capital Expenditures - ---------------------------------- The Company's cash flow from operations and capital expenditures for the six months ended June 30, 1996 and 1995 were as follows (in thousands):
1996 1995 -------- -------- Cash flow from operations $ 83,947 $ 43,713 Capital expenditures Sustaining $ 6,264 $ 5,228 Enhancements 49,754 48,321 New Construction - 766 Acquisitions 13,271 12,760 -------- -------- $ 69,289 $ 67,075 Cash flow from operations increased by $40.2 million for the six months ended June 30, 1996 as compared to the prior year period. The increase in cash flow from operations is primarily a result of increased operating margins in the first six months of 1996 as compared to the prior year period and an increase in cash flow from the net change in various working capital accounts. Management anticipates that capital expenditures in 1996 will be approximately $130.0 million to $150.0 million, including $27.0 million to $30.0 million for existing operations, $90.0 million to $107.0 million for modifications and enhancements of rigs and vessels and $13.0 million related to a deferred purchase payment on a North Sea jackup rig acquired in March 1995. The Company may spend additional funds to acquire rigs or vessels in 1996, depending on market conditions and opportunities. Financing and Capital Resources - ------------------------------- The Company's long-term debt, total capital and debt to capital ratios at June 30, 1996 and December 31, 1995 are summarized below (in thousands, except percentages): JUNE 30, DECEMBER 31, 1996 1995 ---------- ------------ Long-term debt $ 272,988 $159,201 Total capital 1,060,100 690,450 Long-term debt to total capital 26% 23% The increase in long-term debt relates primarily to $128.2 million of debt assumed in the acquisition of Dual offset, in part, by scheduled repayments of existing debt. The total capital of the Company increased due primarily to the issuance of shares of the Company's common stock in the acquisition of Dual valued at $218.4 million, the net increase in long-term debt as discussed above and the profitability of the Company for the six months ended June 30, 1996. On June 12, 1996, the Company acquired Dual pursuant to an Agreement and Plan of Merger among the Company, DDC Acquisition Company and Dual (the "Merger Agreement") approved by Dual stockholders on that date. Under the terms of the Merger Agreement, each share of Dual common stock was immediately converted into the right to receive 0.625 shares of the Company's common stock. The Company issued approximately 10.1 million
shares of its common stock to the previous Dual stockholders in connection with the acquisition of Dual. The Company had $39.0 million undrawn under a revolving line of credit at June 30, 1996. The revolving line of credit is reduced semi-annually by $7.0 million commencing in October 1996, with the remaining line expiring in October 2001. See "Note 4 - Long-Term Debt" to the Company's Consolidated Financial Statements. The Company's liquidity position at June 30, 1996 and December 31, 1995 is summarized in the table below (in thousands, except ratios): JUNE 30, DECEMBER 31, 1996 1995 ---------- ------------ Cash and short-term investments $76,743 $82,064 Working capital 97,749 78,945 Current ratio 1.9 1.9 Based on current energy industry conditions, management believes cash flow from operations, the Company's existing credit facility and the Company's working capital should be sufficient to fund the Company's short and long- term liquidity needs. OTHER MATTERS In mid-July 1996, the Company purchased an additional $3.8 million (face amount) of the Dual 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") on the open market. Additionally, in mid-July 1996 $5.0 million (face amount) of the 9 7/8% Notes were redeemed pursuant to an offer by Dual to purchase the 9 7/8% Notes following a change in control. The Company sold substantially all of the assets of its technical services business in 1995. The consideration received by the Company in the sale consisted of $11.8 million in cash and two notes from the purchaser ("Purchaser") totalling $6.1 million. The notes consisted of a $3.6 million promissory note and a $2.5 million convertible promissory note. In early July 1996, the Purchaser completed an initial public offering of its common stock ("Purchaser's IPO"). In connection with the Purchaser's IPO, the $ 3.6 million promissory note was paid in full and the $2.5 million convertible promissory note was converted into common stock of the Purchaser. The Purchaser's common stock received by the Company in connection with the conversion of the $2.5 million convertible promissory note was sold for $5.4 million in the Purchaser's IPO. The Company will record a gain of approximately $2.9 million, exclusive of taxes, in the third quarter of 1996 associated with the sale of the Purchaser's common stock received by the Company from conversion of the $2.5 million convertible promissory note. In mid-July 1996, the Company sold its remaining land rig, which was located in the Middle East, for $2.5 million. The Company will record a gain of approximately $750,000, exclusive of income taxes, in the third quarter of 1996 associated with the sale of the rig.
PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995 This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The factors that could cause actual results to differ materially include the following: industry conditions and competition, cyclical nature of the industry, worldwide expenditures for oil and gas drilling, operational risks and insurance, risks associated with operating in foreign jurisdictions, and the risks described from time to time in the Company's reports to the Securities and Exchange Commission, which include the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1991, a wholly-owned subsidiary of the Company filed an action against TransAmerican Natural Gas Corporation and related subsidiaries and affiliates ("TransAmerican") seeking damages for breach of contract. In August 1991, TransAmerican filed a state court action against the wholly- owned subsidiary of the Company seeking damages for breach of contract and tort claims. On April 5, 1996, the U.S. District Court for the Southern District of Texas, Houston Division, entered a judgment against TransAmerican. As a result of the judgment, on April 18, 1996 the wholly- owned subsidiary of the Company entered into a settlement agreement with TransAmerican. Under the terms of the settlement agreement, TransAmerican paid the wholly-owned subsidiary of the Company approximately $7.3 million. Additionally, all claims or causes of action which TransAmerican had against the Company or its wholly-owned subsidiary have been dismissed. The Company recorded a gain on the settlement with TransAmerican of $6.4 million in the second quarter of 1996. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 21, 1996, the Company held an annual meeting of stockholders to consider the following proposals: "Proposal 1" - To elect three Class II directors; "Proposal 2" - To approve the Company's 1996 Non-Employee Director Stock Option Plan; and "Proposal 3" - To approve the appointment of Price Waterhouse LLP as the company's independent accountants for 1996. A description of the foregoing matters is contained in the Company's proxy statement, dated March 25, 1996, relating to the 1996 annual meeting of stockholders. There were 60,660,485 shares of the Company's common stock entitled to vote at the annual meeting based on the March 26, 1996 record date. The Company solicited proxies pursuant to Regulation 14 of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's nominees for directors as listed in the proxy statement. Each director received a minimum of 53,000,000 votes, which was in excess of 87% of the outstanding common shares entitled to vote. With respect to Proposal 1 listed above, the voting was as follows: VOTES FOR VOTES AGAINST ABSTENTIONS ---------- ------------- ----------- Craig I. Fields 53,162,916 824,849 471 Morton H. Meyerson 53,161,796 825,859 581 Richard A. Wilson 53,162,998 824,846 393 With respect to Proposals 2 and 3 listed above, the voting was as follows: VOTES FOR VOTES AGAINST ABSTENTIONS ---------- ------------- ----------- Proposal 2 52,097,091 1,295,386 156,670 Proposal 3 53,886,730 54,905 46,379
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Exhibit Index EXHIBIT NO. ---------- 10.25 Amendment No. 1 dated as of June 13, 1996 to the Amended and Restated Credit Facility Agreement dated as of September 27, 1995 by and among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiana Bank OG Kreditkasse, New York Branch, and den Norske Bank AS, New York Branch, as the Banks 10.26 Amendment No. 3, dated June 13, 1996, to the First Preferred Fleet Mortgage dated December 17, 1993, as amended, by ENSCO Offshore Company and Bankers Trust Company, as trustee for the benefit of Christiana Bank OG Kreditkasse, New York Branch, and den Norske Bank AS, New York Branch. 10.27 First Preferred Fleet Mortgage dated June 13, 1996 by ENSCO Offshore Company II and Bankers Trust Company, as trustee for the benefit of Christiana Bank OG Kreditkasse, New York Branch, and den Norske Bank AS, New York Branch. 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated June 12, 1996, with respect to the acquisition of DUAL DRILLING COMPANY ("Dual") pursuant to an Agreement and Plan of Merger between the Company, DDC Acquisition Company and Dual.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENSCO INTERNATIONAL INCORPORATED Date: August 1, 1996 /s/ C. Christopher Gaut ------------------ ---------------------------------- C. Christopher Gaut Chief Financial Officer /s/ H. E. Malone ---------------------------------- H. E. Malone, Corporate Controller and Chief Accounting Officer