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)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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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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Non-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 May 5, 2023 Common stock, $0.0001 par value per share
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED MARCH 31, 2023
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amounts)
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March 31, |
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December 31, |
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2023 |
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2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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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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Three Months Ended March 31, |
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2023 |
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2022 |
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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 |
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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 loss |
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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 STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Three Months Ended March 31, 2023 |
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Retained |
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Additional |
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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, 2023 |
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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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March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended March 31, 2022 |
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Retained |
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Additional |
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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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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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Equity |
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January 1, 2022 |
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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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Stock-based compensation, net of tax |
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— |
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— |
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— |
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March 31, 2022 |
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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.
5
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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2023 |
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2022 |
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Operating activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash used in |
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Depreciation |
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Gain on disposition of assets |
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Deferred tax provision |
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Stock-based compensation expense |
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Contract liabilities, net |
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Contract assets, net |
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Deferred contract costs, net |
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Collateral deposits |
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Other assets, noncurrent |
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Other liabilities, noncurrent |
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Other |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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( |
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Accounts payable and accrued liabilities |
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( |
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Taxes payable |
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( |
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Net cash (used in) provided by operating activities |
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Investing activities: |
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Capital expenditures |
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Proceeds from disposition of assets, net of disposal costs |
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Net cash used in investing activities |
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Financing activities: |
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Borrowings under revolving credit facility |
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Repayments under revolving credit facility |
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Principal payments of finance lease liabilities |
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Net cash (used in) provided by financing activities |
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Net change in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
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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
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, 2022.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States 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.
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.
Restricted Cash
We classify such restricted cash accounts in current assets if the restrictions are expected to expire or otherwise be resolved within one year or if such funds are considered to offset current liabilities. At March 31, 2023 and December 31, 2022, our restricted cash was considered to be current and was recorded in “Restricted cash” in our unaudited Condensed Consolidated Balance Sheets.
Asset Held for Sale
We reported the $
7
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
We are participants in an arrangement with an offshore drilling company whereby we provide management and marketing services (or the MSA) for certain of its rigs. Per the MSA, for stacked rigs we earn a daily service fee and are entitled to reimbursement of direct costs incurred in accordance with the agreement. The daily service fee revenue is recognized in line with the contractual rate billed for the services provided and is reported in “Contract Drilling Revenue” 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 April 2023, we received notice of termination of the marketing arrangement for the managed rigs, which will be effective in the third quarter of 2023. However, termination of the marketing arrangement does not impact the management services that we provide under the MSA.
The managed rigs West Auriga and West Vela commenced operations in the U.S. Gulf of Mexico (or GOM) in March 2022 and October 2022, respectively.
Upon commencement of drilling operations, the MSA for both rigs was suspended and replaced by a charter agreement for the duration of the drilling contracts. We entered into the drilling contract directly with the customer 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.
8
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities related to our contracts with customers (in thousands):
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March 31, |
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December 31, |
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2023 |
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2022 |
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Trade receivables |
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$ |
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$ |
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Current contract assets (1) |
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Current contract liabilities (deferred revenue) (1) |
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( |
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( |
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Noncurrent contract liabilities (deferred revenue) (1) |
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( |
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Changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):
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Net Contract |
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Balances |
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Contract assets at January 1, 2023 |
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$ |
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Contract liabilities at January 1, 2023 |
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( |
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Net balance at January 1, 2023 |
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( |
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Decrease due to amortization of revenue included in the beginning contract liability balance |
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Increase due to cash received, excluding amounts recognized as revenue during the period |
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( |
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Increase due to revenue recognized during the period but contingent on future performance |
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Net balance at March 31, 2023 |
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$ |
( |
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Contract assets at March 31, 2023 |
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$ |
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Contract liabilities at March 31, 2023 |
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( |
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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 March 31, 2023 (in thousands):
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For the Years Ending December 31, |
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(1) |
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Total |
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Mobilization and contract preparation revenue |
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$ |
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$ |
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$ |
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Capital modification revenue |
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Demobilization and other deferred revenue |
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( |
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— |
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( |
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Total |
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$ |
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$ |
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$ |
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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 actual timing of recognition of such amounts may vary due to factors outside of our control. We have applied certain disclosure practical expedients and, accordingly, have excluded estimated variable consideration related to wholly unsatisfied performance obligations or to distinct future time increments within our contracts, including dayrate revenue.
3. Supplemental Financial Information
Unaudited Condensed Consolidated Balance Sheets Information
Accounts receivable, net of allowance for credit losses, consist of the following (in thousands):
9
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March 31, |
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December 31, |
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2023 |
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2022 |
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Trade receivables |
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$ |
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$ |
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Value added tax receivables |
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Federal income tax receivables |
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Related party receivables |
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Other |
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|
|
|
|
|
|
|
||
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
The allowance for credit losses at March 31, 2023 and December 31, 2022 represents our estimate of credit losses associated with our “Trade receivables” and “Current contract assets.” See Note 4 “Financial Instruments and Fair Value Disclosures” for a discussion of our concentrations of credit risk and allowance for credit losses.
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Prepaid taxes |
|
$ |
|
|
$ |
|
||
Deferred contract costs |
|
|
|
|
|
|
||
Prepaid rig costs |
|
|
|
|
|
|
||
Rig spare parts and supplies |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Software maintenance agreements and subscriptions |
|
|
|
|
|
|
||
Deferred survey costs |
|
|
|
|
|
|
||
Current contract assets |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Accrued liabilities consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Rig operating costs |
|
$ |
|
|
$ |
|
||
Contract advances |
|
|
|
|
|
|
||
Payroll and benefits |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Accrued capital project/upgrade costs |
|
|
|
|
|
|
||
Current operating lease liability |
|
|
|
|
|
|
||
Personal injury and other claims |
|
|
|
|
|
|
||
Shorebase and administrative costs |
|
|
|
|
|
|
||
Deposit for equipment sale |
|
|
|
|
|
|
||
Interest payable |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
10
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):
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Accrued but unpaid capital expenditures at period end |
|
$ |
|
|
$ |
|
||
Common stock withheld for payroll tax obligations (1) |
|
|
|
|
|
|
||
Cash interest payments |
|
|
|
|
|
|
||
Cash income taxes paid, net of (refunds): |
|
|
|
|
|
|
||
Foreign |
|
|
|
|
|
|
||
U.S. Federal |
|
|
( |
) |
|
|
|
|
4. Financial Instruments and Fair Value Disclosures
Concentrations of Credit Risk and Allowance for Credit Losses
Our credit risk corresponds primarily to trade receivables. The market for our services is the offshore oil and gas industry, and our customer base consists primarily of major and independent oil and gas companies, as well as government-owned oil companies. At March 31, 2023, 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 have 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 March 31, 2023, 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 March 31, 2023, $
Pursuant to Financial Accounting Standards Board ASU No. 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.
11
For purposes of calculating our current estimate of credit losses at March 31, 2023 and December 31, 2022, 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:
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).
|
|
March 31, 2023 |
|
|||||||||||||||||
|
|
Fair Value Measurements Using |
|
|
|
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Liabilities at |
|
|
Total Losses for Three Months Ended (1) |
|
|||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
restricted stock units |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
December 31, 2022 |
|
|||||||||||||||||
|
|
Fair Value Measurements Using |
|
|
|
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Liabilities at |
|
|
Total Losses for Year Ended (1) |
|
|||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
restricted stock units |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
12
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 6 “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:
Our long-term 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 March 31, 2023 and December 31, 2022.
Fair values and related carrying values of our long-term debt are shown below (in millions).
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
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.
5. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
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 |
|
$ |
|
|
$ |
|
||
13
6. Long-Term Debt
At March 31, 2023 and December 31, 2022, the carrying value of our long-term debt (or Exit Debt), net of unamortized discount, premium and debt issuance costs, was comprised as follows (in thousands):
|
|
March 31, |
|
December 31, |
|
||
|
|
2023 |
|
2022 |
|
||
Borrowings under Exit RCF |
|
$ |
|
$ |
|
||
Exit Term Loans |
|
|
|
|
|
||
First Lien Notes |
|
|
|
|
|
||
Total Exit Debt, net |
|
$ |
|
$ |
|
||
The Exit Revolving Credit Agreement (as defined below) obligates Diamond Offshore Drilling, Inc., the borrower thereunder and their respective restricted subsidiaries to comply with certain financial maintenance covenants as specified in the Exit Revolving Credit Agreement. The Exit Revolving Credit Agreement and Exit Term Loan Credit Agreement (as defined below) and the indenture governing our
Additionally, these agreements contain other covenants, representations and warranties and events of default that are customary for financings of this type. At March 31, 2023, we were in compliance with all covenants under the Exit Revolving Credit Agreement and other Exit Debt.
Exit Revolving Credit Agreement
On April 23, 2021, 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 March 31, 2023, we had borrowings outstanding of $
At May 5, 2023, we had borrowings of $
Exit Term Loan Credit Agreement
Our senior secured term loan credit agreement (or the Exit Term Loan Credit Agreement) provides for a $
14
$
7. 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 $
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 generally 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 March 31, 2023, our estimated liability for personal injury claims was $
15
Purchase Obligations. At March 31, 2023, 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 that commenced in 2016 that also include an option to purchase the leased equipment at the end of the respective lease term.
Letters of Credit and Other. We were contingently liable as of March 31, 2023 in connection with approximately $
8. 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) 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).
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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) |
|
|
|
|
|
|
||
As of March 31, 2023, we had
The computation of EPS for the three-month period ended March 31, 2023 excludes non-vested stock-based awards of
16
9. 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 March 31, 2023, our active drilling rigs were located offshore
The following tables provide information about disaggregated revenue by country (in thousands):
|
|
Three Months Ended March 31, 2023 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Three Months Ended March 31, 2022 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Australia |
|
|
|
|
|
|
|
|
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Myanmar |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
17
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 and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022. 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 owned semisubmersibles and two managed rigs). See “– Market Overview.”
Market Overview
As we progressed into the first quarter of 2023, commodity prices remained elevated as a result of ongoing demand recovery from the COVID-19 pandemic, continued supply disruptions from the Russia/Ukraine conflict, OPEC+ supply restraint and limited U.S. production growth. Oil and natural gas benchmark prices are expected to remain volatile given the current global economic uncertainty and geopolitical events affecting supply and demand. Recent OPEC+ supply decisions have prompted a rebound in oil prices after hitting a 16-month low in mid-March 2023. Over the near-to-medium term, commodity prices are expected to remain at levels that are supportive of investment in deepwater exploration and development projects. As of May 3, 2023, dated Brent crude oil prices for the remainder of 2023 and 2024 were in the $70-per-barrel range.
The structural upcycle in the offshore drilling sector continues to be supported by strong cash flows realized by oil and gas companies, continuing expectations for growing demand, and breakeven costs well below current oil price forecasts. These factors are prompting a significant recovery in offshore upstream capital expenditures after more than eight years of underinvestment. According to industry reports, analysts expect offshore upstream capital expenditures spend to increase approximately 10% year over year, on average, from 2023 to 2025, approaching $200 billion by 2025 with exploration capital expenditures growing to 15 percent of the total.
The positive dynamics of increased offshore spending and the push for diversity of supply have expanded demand for floating drilling rigs. According to S&P Global, new tender demand for floating drilling rigs for the twelve months ended March 31, 2023 reached its highest level since 2012. Several multi-year tenders for work in Brazil, West Africa, Asia and Australia are expected to be awarded in the coming months. Looking ahead, some industry sources estimate that demand for floating drilling rigs will grow by 8% year over year, on average, from 2023 to 2025. Industry reports show that, in the first quarter of 2023, utilization for floating drilling rigs increased for the ninth consecutive quarter, further strengthening the favorable environment for deepwater dayrates. Upward trends in rig dayrates have prompted additional transactions for stranded rigs and further reactivations of stacked units during the first quarter of 2023. While these events may increase future active rig supply, we do not expect this to have a material impact on the overall supply/demand balance for drilling rigs as additional upstream capital spending continues to drive demand higher. Further, supply chain constraints and inflationary pressures could limit the pace at which these added rigs return to the market. Inflationary pressures remain elevated, despite policy tightening by major central banks and a moderating pace of world economic expansion, which may create upward pressure on operating expenses for offshore drillers.
In addition to market factors, customer capital allocation decisions will continue to affect demand for our services. Investment mixes over time, coupled with energy demand and regulatory measures, could adversely impact demand for offshore drilling services in the long term. Notwithstanding this possibility, global energy demand continues to be strong while energy supply growth remains constrained. We expect increased investment in both traditional and renewable sources of energy to be required in the future, much of which we expect to be invested in finding and producing hydrocarbons in the offshore segment. Oil and gas are expected to remain the largest sources of energy in the foreseeable future.
See “– Contract Drilling Backlog” for future commitments of our rigs during the remainder of 2023 through 2027.
18
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 April 1, 2023 (based on information available at that time), January 1, 2023 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2022), and April 1, 2022 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022) (in millions).
|
|
April 1, |
|
|
January 1, |
|
|
April 1, |
|
|||
Contract Drilling Backlog |
|
$ |
1,596 |
|
|
$ |
1,788 |
|
|
$ |
1,152 |
|
The following table reflects the amount of revenue related to our contract drilling backlog by year as of April 1, 2023 (in millions).
|
For the Years Ending December 31, |
|
||||||||||||||||
|
Total |
|
2023 (1) |
|
2024 |
|
2025 |
|
2026 |
|
2027 |
|
||||||
Contract Drilling Backlog (2) |
$ |
1,596 |
|
$ |
711 |
|
$ |
526 |
|
$ |
152 |
|
$ |
106 |
|
$ |
101 |
|
19
The following table reflects the percentage of rig days per year committed as of April 1, 2023. 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, |
|
|||||||||||||||||
|
|
2023 (1) |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|||||
Percentage of Rig Days Committed (2) |
|
|
69 |
% |
|
|
38 |
% |
|
|
11 |
% |
|
|
8 |
% |
|
|
8 |
% |
Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows
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 remainder of 2023, we expect to incur approximately 205 days of planned downtime, including approximately 104 days for a maintenance project to meet regulatory requirements for the Ocean Apex and approximately 101 days for capital modifications and contract preparation activities for the Ocean Courage. 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 our owned 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).
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 generally 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, 2022.
20
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 three-month periods ended March 31, 2023, December 31, 2022 and March 31, 2022.
Results for the Three-Month Periods Ended March 31, 2023, December 31, 2022 and March 31, 2022
|
|
Three Months Ended |
|
|||||||||
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||
|
|
2023 |
|
|
2022 |
|
|
2022 |
|
|||
REVENUE-EARNING DAYS (1) |
|
|
789 |
|
|
|
836 |
|
|
|
668 |
|
UTILIZATION (2) |
|
|
63 |
% |
|
|
65 |
% |
|
|
53 |
% |
AVERAGE DAILY REVENUE (3) |
|
$ |
271,700 |
|
|
$ |
248,600 |
|
|
$ |
224,900 |
|
|
|
|
|
|
|
|
|
|
|
|||
CONTRACT DRILLING REVENUE |
|
$ |
214,383 |
|
|
$ |
207,752 |
|
|
$ |
150,252 |
|
REVENUE RELATED TO REIMBURSABLE |
|
|
17,638 |
|
|
|
15,512 |
|
|
|
35,987 |
|
TOTAL REVENUES |
|
$ |
232,021 |
|
|
$ |
223,264 |
|
|
$ |
186,239 |
|
CONTRACT DRILLING EXPENSE, EXCLUDING |
|
$ |
173,490 |
|
|
$ |
178,363 |
|
|
$ |
144,902 |
|
REIMBURSABLE EXPENSES |
|
$ |
17,213 |
|
|
$ |
15,030 |
|
|
$ |
35,613 |
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|||
Contract drilling services, net |
|
$ |
40,893 |
|
|
$ |
29,389 |
|
|
$ |
5,350 |
|
Reimbursable expenses, net |
|
|
425 |
|
|
|
482 |
|
|
|
374 |
|
Depreciation |
|
|
(27,906 |
) |
|
|
(24,764 |
) |
|
|
(26,952 |
) |
General and administrative expense |
|
|
(19,585 |
) |
|
|
(17,391 |
) |
|
|
(16,732 |
) |
Gain on disposition of assets |
|
|
1,213 |
|
|
|
93 |
|
|
|
4,044 |
|
Total Operating Loss |
|
$ |
(4,960 |
) |
|
$ |
(12,191 |
) |
|
$ |
(33,916 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|||
Interest income |
|
|
7 |
|
|
|
6 |
|
|
|
1 |
|
Interest expense, net of amounts capitalized |
|
|
(12,040 |
) |
|
|
(11,631 |
) |
|
|
(8,325 |
) |
Foreign currency transaction gain |
|
|
(1,271 |
) |
|
|
(2,738 |
) |
|
|
(2,129 |
) |
Other, net |
|
|
(152 |
) |
|
|
(220 |
) |
|
|
1,362 |
|
Loss before income tax benefit (expense) |
|
|
(18,416 |
) |
|
|
(26,774 |
) |
|
|
(43,007 |
) |
Income tax benefit (expense) |
|
|
25,645 |
|
|
|
(25,664 |
) |
|
|
8,653 |
|
NET INCOME (LOSS) |
|
$ |
7,229 |
|
|
$ |
(52,438 |
) |
|
$ |
(34,354 |
) |
21
Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022
Contract Drilling Revenue. Contract drilling revenue increased $6.6 million during the three months ended March 31, 2023 compared to the three months ended December 31, 2022, primarily due to higher average daily revenue earned ($18.3 million), partially offset by the impact of fewer R-E days ($11.7 million).
Average daily revenue earned during the first quarter of 2023 increased, quarter-over-quarter, primarily due to a higher dayrate earned by the Ocean BlackHornet, which commenced operating under a two-year contract extension in mid-first quarter 2023. Our first quarter results also included the Ocean GreatWhite, which commenced drilling operations in the North Sea after completion of its reactivation that began in the third quarter of 2022 and the Ocean Endeavor which returned to service after an extended shipyard period at the end of 2022.
The reduction in R-E days in the first quarter of 2023, compared to the fourth quarter of 2022, was primarily the result of downtime associated with the Ocean Endeavor’s shipyard project (20 fewer R-E days), the earlier than expected contract completion for the managed rig West Vela (16 fewer R-E days) and other net incremental downtime across the remaining fleet (11 fewer R-E days).
Revenue Related to Reimbursable Expenses. During the first quarter of 2023, we recognized gross reimbursable revenue and expenses of $17.6 million, including $6.4 million earned under the MSA. Gross reimbursable revenue and expenses for the fourth quarter of 2022 were $15.5 million and included $0.7 million earned under the MSA.
Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation decreased $4.9 million during the first quarter of 2023 compared to the fourth quarter of 2022. Costs for the 2023 quarter reflected lower contract drilling expense for the Ocean Onyx, which was cold stacked in the fourth quarter of 2022, and reductions due to the deferral of contract preparation costs associated with the Ocean GreatWhite’s contract in the North Sea. This favorable reduction in contract drilling expense was partially offset by higher personnel-related costs in the first quarter of 2023 due to a change in estimate that resulted in the reversal of accrued benefit costs in the fourth quarter of 2022 related to our Senegal operations. In addition, results for the first quarter of 2023 included mobilization costs for the Ocean Apex and Ocean Endeavor, which were preparing for and completing shipyards, respectively.
General and Administrative Expense. General and administrative expense for the first quarter of 2023 increased by $2.2 million compared to the fourth quarter of 2022, primarily due to increased personnel costs and professional fees.
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 $25.6 million (139.2% effective tax rate) for the three months ended March 31, 3023, inclusive of a $3.2 million benefit reflecting remeasurement of unrecognized tax benefits that was principally due to continued devaluation of the Egyptian pound. For the three months ended December 31, 2022, we recorded net income tax expense of $25.7 million (negative 95.9% effective tax rate). The higher effective tax rate for the first quarter of 2023 reflects our domestic and international jurisdictional mix of estimated pre-tax income and losses.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Contract Drilling Revenue. Contract drilling revenue increased $64.1 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Comparing the periods, the increase in contract
22
drilling revenue was attributable to a 121-day increase in R-E days ($27.1 million), combined with the effect of higher average daily revenue earned ($37.0 million).
The increase in R-E days was primarily due to fewer downtime days during the first quarter of 2023, compared to the first quarter of 2022, attributable to a reduction in downtime for the warm stacking of rigs between contracts (84 incremental R-E days) and inspections and repairs (76 incremental R-E days). R-E days for the first quarter of 2023 also included incremental R-E days for our managed rigs (115 days), as well as other incremental R-E days (18 days). The increase in incremental R-E days in the first quarter of 2023 was partially offset by fewer R-E days as a result of the cold stacking of the Ocean Monarch and Ocean Onyx after the first quarter of 2022 (172 days).
Average daily revenue earned during the first quarter of 2023 increased primarily due to higher dayrates earned by the Ocean BlackHornet under a contract extension in the U.S. Gulf of Mexico, the Ocean BlackHawk in Senegal and the Ocean Patriot in the U.K., compared to dayrates earned during the first quarter of 2022.
Revenue Related to Reimbursable Expenses. Gross reimbursable revenue and expenses for the first quarter of 2023 were $17.6 million, including $6.4 million earned under the MSA, compared to $35.9 million, including $23.2 million earned under the MSA, for the first quarter of 2022.
Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation increased $28.6 million during the three months ended March 31, 2023, compared to the same period in 2022. Higher expenses for the first quarter of 2023, included costs for the Ocean Vela, a second rig which we began managing under the MSA in the second quarter of 2022, and incremental costs associated with the reactivation of the Ocean GreatWhite. Contract drilling expense for the 2023 period was favorably impacted by reduced expense attributable to the cold-stacked Ocean Onyx and Ocean Monarch.
General and Administrative Expense. General and administrative expense for the first quarter of 2023 increased $2.9 million compared to the first quarter of 2022, primarily due to an increase in equity compensation expense as a result of higher award values in 2023, compared to 2022 awards, as well as an increase in headcount at our corporate headquarters.
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 first quarter of 2023 increased $3.7 million compared to the first quarter of 2022, primarily due to higher market interest rates on outstanding indebtedness, combined with a higher average borrowing volume in the first three months of 2023.
Income Tax Benefit. We recorded a net income tax benefit of $25.6 million (139.2% effective tax rate) for the three months ended March 31, 2023, as compared to a net income tax benefit of $8.7 million (20.1% effective tax rate) for the three months ended March 31, 2022. The higher effective tax rate for the three months ended March 31, 2023 reflects our domestic and international jurisdictional mix of estimated pre-tax income and losses.
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 includes an aggregate of $50.0 million of commitments for the issuance of letters of credit thereunder (or the Exit RCF). The Exit RCF is scheduled to mature on April 22, 2026.
At May 5, 2023, we had borrowings of $182.5 million outstanding under the Exit RCF and had utilized $19.3 million for the issuance of letters of credit. As of May 5, 2023, approximately $201.6 million was available for borrowings or the issuance of letters of credit under the Exit RCF. However, the availability of borrowings and letters
23
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.
Additionally, we 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 had been issued as of May 5, 2023.
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 May 5, 2023, 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.
From time to time, based on market conditions and other factors, we may seek to repay, refinance or restructure all or a portion of our outstanding indebtedness or otherwise enter into transactions regarding our capital structure to obtain more favorable terms, enhance flexibility in conducting our business, increase liquidity or otherwise. We regularly evaluate capital markets to consider future opportunities for enhancements of our capital structure and may opportunistically pursue financing transactions to optimize our capital structure. Our ability to access the capital markets by issuing debt or equity securities will be dependent on our results of operations, our current financial condition, current credit ratings, current market conditions and other factors beyond our control, and there can be no assurance that we would be able to complete any such offering of securities.
As of April 1, 2023, our contractual backlog was approximately $1.6 billion. At March 31, 2023, we had cash of $41.3 million, including $22.8 million that is subject to restrictions pursuant to the MSA.
Sources and Uses of Cash
Cash Flows and Cash Expenditures
For the three-month period ended March 31, 2023, our operating activities used cash of $8.2 million. Cash expenditures for contract drilling, shorebase support, and general and administrative costs ($232.9 million), were partially offset by cash receipts from contract drilling services ($217.0 million) and a net refund of cash income taxes ($7.7 million), primarily in the U.S. tax jurisdiction, during the three-month period.
Cash outlays for capital expenditures during the first quarter of 2023 aggregated $29.4 million (including capital outlays for the Ocean Endeavor and Ocean GreatWhite shipyard projects completed this year). We also repaid $15.0 million in outstanding draws under the Exit RCF and made payments in connection with finance lease obligations aggregating $4.1 million related to well control equipment on our owned drillships.
For the three-month period ended March 31, 2022, our operating activities generated cash flows of $9.1 million. Cash receipts from contract drilling services ($199.4 million) were partially offset by cash expenditures for contract drilling, shorebase support, general and administrative costs, cash collateral requirements and cash income taxes paid ($190.3 million).
Cash outlays for capital expenditures and finance lease obligations during the first three months of 2022 aggregated $20.0 million and $3.8 million, respectively. Asset sales, including the sale of the Ocean Valor, generated cash proceeds of $5.0 million during the same period. We borrowed $20.0 million under the Exit RCF during the first three months of 2022.
Capital Expenditures and Other Projects
24
We have historically invested a significant portion of our cash flows in the enhancement of our drilling fleet and our ongoing rig equipment replacement and capital maintenance programs. The amount of cash required to meet our capital commitments is determined by evaluating the need to upgrade our rigs to meet specific customer requirements and our rig equipment enhancement, maintenance and replacement programs. We make periodic assessments of our capital spending programs based on current and expected industry conditions and our cash flow forecast. As of the date of this report, we expect capital expenditures for 2023 to be approximately $120.0 million to $135.0 million.
Other Obligations
As of March 31, 2023, the total net unrecognized tax benefits related to uncertain tax positions that could result in a future cash payment was $33.1 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 7 “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 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:
25
26
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 our Annual Report on Form 10-K for the year ended December 31, 2022.
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 March 31, 2023, our variable interest rate debt included $162.5 million of outstanding borrowings under the Exit RCF, including $3.5 million in payment-in-kind loans and $100.0 million outstanding under our senior secured term loan agreement. 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 $2.6 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 three months ended March 31 2023. 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, 2022 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.
27
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 March 31, 2023. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2023.
There were no changes in our internal control over financial reporting identified in connection with the foregoing evaluation that occurred during our first fiscal quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
28
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Information related to certain legal proceedings is included in Note 7 “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, 2022 includes a detailed discussion of certain material risk factors facing the Company. The risk factors included under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 is incorporated herein by reference. No material changes have been made to such risk factors as of March 31, 2023.
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 March 31, 2023, 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 |
||
January 1, 2023 through January 31, 2023 |
|
— |
|
$ |
|
— |
|
N/A |
N/A |
February 1, 2023 through February 28, 2023 |
|
— |
|
|
|
— |
|
N/A |
N/A |
March 1, 2023 through March 31, 2023 |
|
10,946 |
|
|
|
12.27 |
|
N/A |
N/A |
Total |
|
10,946 |
|
$ |
|
12.27 |
|
N/A |
N/A |
ITEM 5. Other Information.
On February 9, 2023, our board of directors (or the Board) approved amendments (or the Amendments) to our Second Amended and Restated Bylaws as set forth in our Third Amended and Restated Bylaws (or the Amended Bylaws) that the Board adopted effective as of February 9, 2023.
Among other changes, the Amendments address the new universal proxy rules in Rule 14a-19 under the Exchange Act by, among other things, (i) clarifying that no person may solicit proxies in support of a director nominee other than the Board’s nominees unless such person has complied with Rule 14a-19, including applicable notice and solicitation requirements, and (ii) providing that if the stockholder provides notice pursuant to Rule 14a-19 with respect to a proposed nominee and subsequently fails to comply with requirements of Rule 14a-19, we will disregard the nomination of the proposed nominee. The Amendments also require that a stockholder soliciting proxies use a proxy card color other than white (with white proxy cards reserved for exclusive use by the Board).
29
The foregoing summary of the Amendments set forth in the Amended Bylaws does not purport to be complete and is qualified in its entirety by reference to the complete text of the Amended Bylaws, a copy of which is filed as Exhibit 3.2 to this report.
30
ITEM 6. Exhibits.
* Filed or furnished herewith.
31
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.
|
|
|
DIAMOND OFFSHORE DRILLING, INC. |
||
|
|
|
(Registrant) |
||
|
|
|
|
|
|
Date May 9, 2023 |
|
|
By: |
|
/s/ Dominic A. Savarino |
|
|
|
|
|
Dominic A. Savarino |
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
32