UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Non-accelerated filer |
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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 ☐ No
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 6, 2024 Common stock, $0.0001 par value per share
DIAMOND OFFSHORE DRILLING, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED MARCH 31, 2024
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Condensed Consolidated Statements of Comprehensive Income |
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Condensed Consolidated Statements of Stockholders’ Equity |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 5. |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value amounts)
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March 31, |
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December 31, |
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2024 |
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2023 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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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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Accumulated other comprehensive income |
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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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2024 |
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2023 |
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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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Loss (gain) on disposition of assets |
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Total operating expenses |
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Operating income (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 gain (loss) |
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Other, net |
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Income (loss) before income tax benefit |
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Income tax benefit |
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Net income |
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$ |
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$ |
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Earnings per share |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average shares outstanding |
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Basic |
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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 COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Net income |
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$ |
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$ |
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Other comprehensive loss, net |
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Unrealized loss on marketable securities (net of tax of $ |
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Comprehensive income |
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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 STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Three Months Ended March 31, 2024 |
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Accumulated |
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Additional |
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Other |
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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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Comprehensive |
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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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Income |
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Shares |
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Amount |
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Equity |
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January 1, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net 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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— |
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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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Unrealized loss on marketable securities |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended March 31, 2023 |
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Additional |
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Total |
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Common Stock |
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Paid-In |
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Accumulated |
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Treasury Stock |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Shares |
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Amount |
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Equity |
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January 1, 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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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
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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2024 |
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2023 |
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Operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash |
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provided by (used in) operating activities: |
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Depreciation |
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Loss (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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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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Accounts payable and accrued liabilities |
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Taxes payable |
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Net cash provided by (used in) 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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Repayments under revolving credit facility |
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Principal payments of finance leases |
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Net cash used in 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.
7
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, 2023.
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 comprehensive income, 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, 2024 and December 31, 2023, 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 $
Accounting Principles Not Yet Adopted
In December 2023, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (or ASU) No. 2023-09, Income Tax (Topic 740): Improvements to Income Tax Disclosures (or ASU 2023-09). ASU 2023-09 requires business entities on an annual basis to (i) disclose specific categories in the rate reconciliation and (ii) provide additional information for reconciling items that meet certain quantitative thresholds. The new guidance is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statement disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (or ASU 2023-07). ASU 2023-07 modifies the disclosure and presentation requirements of reportable segments and requires the disclosure of significant segment expenses that are regularly
8
provided to the chief operating decision maker and included within each reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statement disclosures.
2. Revenue from Contracts with Customers
Our contracts with customers provide for an offshore drilling rig and drilling services on a dayrate contract basis. The integrated services provided under our contracts primarily include (i) provision of an offshore drilling rig, the work crew and supplies of equipment and services necessary to operate the rig, (ii) mobilization and demobilization of the rig to and from the drill site and (iii) performance of rig preparation activities and/or modifications required for each contract.
We account for the integrated services provided within our drilling contracts as a single performance obligation satisfied over time, comprised of a series of distinct time increments in which we provide drilling services. The total transaction price is recognized for each drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term.
Revenues Related to Managed Rigs
In 2021, we entered into an arrangement with an offshore drilling company whereby we would provide management and marketing services (or the MMSA) for certain of their rigs. The MMSA provided for (i) a daily fixed fee, based on status of the drilling rig, (ii) marketing fees based on a percentage of the earned dayrate of a drilling contract secured by us on behalf of the rig owner, (iii) a variable management fee and (iv) reimbursement of direct cost incurred. The fixed and variable fees were recognized in “Contract drilling” revenue in our unaudited Condensed Consolidated Statements of Operations. Revenue related to the reimbursement of expenses incurred and billed to the rig owner were recorded as “Revenues related to reimbursable expenses” in our unaudited Condensed Consolidated Statements of Operations.
We may enter into certain drilling contracts directly with a customer. We are considered principal or agent of these transactions and recognize revenue under the terms of the contract. Such amounts are reported as “Contract drilling” revenue in our unaudited Condensed Consolidated Statements of Operations. In addition, we charter the related drilling rig from the rig owner to satisfy our performance obligation under the contract. We have determined that the arrangement to charter the rig 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.
The marketing arrangements for each of the managed rigs, the West Auriga and the West Vela, were terminated in 2023. Additionally, the management and charter agreements for the West Auriga were terminated in the first quarter of 2024, and the rig was returned to its owner at the end of February 2024. We also received notice of termination of the management agreement for the West Vela in April 2024, which will become effective after 90 days. The termination of the management agreement will have no effect on the bareboat charter agreement for the West Vela, which provides that it will continue in accordance with its terms until the completion of the rig’s existing drilling contract and any option periods.
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, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Trade receivables |
|
$ |
|
|
$ |
|
||
Current contract assets (1) |
|
|
|
|
|
|
||
Current contract liabilities (deferred revenue) (1) |
|
|
( |
) |
|
|
( |
) |
Noncurrent contract liabilities (deferred revenue) (1) |
|
|
( |
) |
|
|
( |
) |
9
Changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):
|
|
Contract |
|
|
Contract |
|
||
|
|
Assets |
|
|
Liabilities |
|
||
Balance as of January 1, 2024 |
|
$ |
|
|
$ |
( |
) |
|
Decrease due to amortization of revenue included in the beginning contract liability balance |
|
|
— |
|
|
|
|
|
Increase due to cash received, excluding amounts recognized as revenue during the period |
|
|
— |
|
|
|
( |
) |
Increase due to revenue recognized during the period but contingent on future performance |
|
|
|
|
|
— |
|
|
Decrease due to transfer to receivables during the period |
|
|
( |
) |
|
|
— |
|
Adjustments |
|
|
( |
) |
|
|
— |
|
Balance as of March 31, 2024 |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Transaction Price Allocated to Remaining Performance Obligations
The following table reflects revenue expected to be recognized in the future related to unsatisfied performance obligations as of March 31, 2024 (in thousands):
|
|
For the Year Ending December 31, |
|
|||||||||||||||||
|
|
(1) |
|
|
|
|
|
|
|
|
Total |
|
||||||||
Mobilization and contract preparation revenue |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Capital modification revenue |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Blended rate/other revenue |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
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 the disclosure practical expedient in FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments and have excluded estimated variable consideration related to wholly unsatisfied performance obligations or to distinct future time increments within our contracts, including dayrate revenue.
10
3. Supplemental Financial Information
Unaudited Condensed Consolidated Balance Sheets Information
Accounts receivable, net of allowance for credit losses, consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Trade receivables |
|
$ |
|
|
$ |
|
||
Insurance claim receivable (1) |
|
|
|
|
|
|
||
Value added tax receivables |
|
|
|
|
|
|
||
Related party receivables |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Allowance for credit losses (2) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Deferred contract costs |
|
$ |
|
|
$ |
|
||
Collateral deposit |
|
|
|
|
|
|
||
Prepaid taxes |
|
|
|
|
|
|
||
Rig spare parts and supplies |
|
|
|
|
|
|
||
Current contract assets |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid rig costs |
|
|
|
|
|
|
||
Software maintenance agreements and subscriptions |
|
|
|
|
|
|
||
Deferred survey costs |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Accrued liabilities consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Rig operating costs |
|
$ |
|
|
$ |
|
||
Contract advances |
|
|
|
|
|
|
||
Payroll and benefits |
|
|
|
|
|
|
||
Interest payable |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Personal injury and other claims |
|
|
|
|
|
|
||
Current operating lease liability |
|
|
|
|
|
|
||
Accrued capital project/upgrade costs |
|
|
|
|
|
|
||
Deposit for equipment sale |
|
|
|
|
|
|
||
Shorebase and administrative costs |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
11
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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
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 arises primarily from 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, 2024, 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. We currently have one customer for which prepayments are required and full payment is due prior to commencement of the contract in the second half of 2024. At March 31, 2024, no amounts were owed by this customer.
Pursuant to FASB ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and its related amendments (or ASU 2016-13), 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. 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 ASU 2016-13 and its related amendments (or collectively, CECL), we determined that it would be appropriate to segregate 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 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.
At March 31, 2024, $
12
under CECL. See Note 3 “Supplemental Financial Information — Unaudited Condensed Consolidated Balance Sheets Information.”
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, 2024 |
|
|||||||||||||||||
|
|
Fair Value Measurements Using |
|
|
|
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Assets (Liabilities) |
|
|
Total Losses for |
|
|||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Short-term investments (1) |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
restricted stock units (2) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
December 31, 2023 |
|
|||||||||||||||||
|
|
Fair Value Measurements Using |
|
|
|
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Assets (Liabilities) |
|
|
Total Losses for Year Ended (2) |
|
|||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Short-term investments (1) |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
restricted stock units (2) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
13
We believe that the carrying amounts of our other financial assets and liabilities (excluding our 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, such indebtedness would be considered Level 2 liabilities. The fair value of the instrument was derived using valuation specialists at March 31, 2024 and December 31, 2023.
Fair values and related carrying values of our Second Lien Notes (as defined below in Note 6 “Long-Term Debt”) are shown below (in millions).
|
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
Second Lien Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
We have estimated the fair value amounts by using appropriate valuation methodologies and information available to management. Certain inputs and value drivers are observed and obtained in active markets from similar assets or liabilities while 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, |
|
||
|
|
2024 |
|
|
2023 |
|
||
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 |
|
$ |
|
|
$ |
|
||
6. Long-Term Debt
At March 31, 2024 and December 31, 2023, the carrying value of our long-term debt, net of unamortized discount, premium and debt issuance costs, was comprised as follows (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
$ |
|
$ |
|
|
$ |
|
||
Second Lien Notes
On September 21, 2023, Diamond Foreign Asset Company and Diamond Finance, LLC (collectively referred to as the Issuers) issued $
14
each year, beginning on April 1, 2024. The Second Lien Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by Diamond Offshore Drilling, Inc. (or DODI) and each of its existing restricted subsidiaries (other than the Issuers) and by certain of DODI’s future restricted subsidiaries (other than the Issuers).
The Second Lien Notes obligate DODI and its specified subsidiaries to comply with an indenture dated as of September 21, 2023 (or the Indenture) entered into by the Issuers, DODI and certain of its subsidiaries named therein and HSBC Bank USA, National Association. The Indenture contains covenants that, among other things, restrict DODI’s ability and the ability of certain of its subsidiaries to: (i) incur additional debt and issue certain preferred stock; (ii) incur or create liens; (iii) make certain dividends, distributions, investments and other restricted payments; (iv) sell or otherwise dispose of certain assets; (v) engage in certain transactions with affiliates; and (vi) merge, consolidate, amalgamate or sell, transfer, lease or otherwise dispose of all or substantially all of DODI’s assets. These covenants are subject to important exceptions and qualifications.
The Second Lien Notes were valued at par at issuance and were presented net of unamortized debt issuance costs of $
Revolving Credit Agreement
Our revolving credit agreement provides for a $
At March 31, 2024 and May 6, 2024, we had
There is
At March 31, 2024, we were in compliance with all covenants under the Second Lien Notes and the RCF.
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 $
15
Other Litigation. We have been named in various other claims, lawsuits or threatened actions that are incidental to the ordinary course of our business. 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, which renewed effective May 1, 2024, 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, 2024, our estimated liability for personal injury claims was $
Purchase Obligations. At March 31, 2024, 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.
16
8. Ocean GreatWhite Insurance Claim
On February 1, 2024, the Ocean GreatWhite reported an equipment incident while located in the North Sea west of the Shetland Islands. The rig’s lower marine riser package (or LMRP) and deployed riser string unintentionally separated from the rig at the slip joint tensioner ring, and the LMRP and riser dropped to the seabed. Since the incident, we have been working closely with our customer and local authorities in response and have pursued efforts to recover the equipment and replace missing or damaged equipment. We have safely recovered the LMRP from the seabed and are in a repair facility in Kishorn port, where repairs to the LMRP and any related work are underway.
As of the date of this report, $
9. Earnings Per Share
We compute basic earnings per share by dividing net income available to holders of our common stock by the weighted-average number of shares of our common stock outstanding during the period. Diluted earnings 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 unit awards and performance stock unit awards.
A reconciliation of the numerators and denominators of our basic and diluted EPS computations is summarized as follows (in thousands).
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net income – basic and diluted (numerator) |
|
$ |
|
|
$ |
|
||
Weighted average shares – basic (denominator): |
|
|
|
|
|
|
||
Dilutive effect of stock-based awards |
|
|
|
|
|
|
||
Weighted average shares including conversions – diluted (denominator) |
|
|
|
|
|
|
||
The computation of EPS for the three-month periods ended March 31, 2024 and March 31, 2023 excluded non-vested stock-based awards of
As of March 31, 2024, we had
17
10. 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, 2024, our active drilling rigs were located offshore
The following tables provide information about disaggregated revenue by country (in thousands):
|
|
Three Months Ended March 31, 2024 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Three Months Ended March 31, 2023 |
|
|||||||||
|
|
Total |
|
|
Revenues |
|
|
Total |
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
United Kingdom |
|
|
|
|
|
|
|
|
|
|||
Australia |
|
|
|
|
|
|
|
|
|
|||
Brazil |
|
|
|
|
|
— |
|
|
|
|
||
Senegal |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
18
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, 2023. 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 12 floater rigs (four owned drillships, seven owned semisubmersibles and one managed rig). See “– Market Overview.”
Market Overview
During the first quarter of 2024, oil commodity prices remained elevated above their 5-year average, primarily as a result of continued OPEC+ supply restraint, muted production growth in the United States, strong growth in oil demand and expanding manufacturing trends in the United States and China signaling global economic improvements. Oil and natural gas benchmark prices are expected to remain volatile as geopolitical uncertainty resulting from conflicts in Russia/Ukraine and the Middle East may affect supply and demand. Brent crude prices reached the high $80- to low $90-per barrel range in mid-April 2024, which are the highest levels reached since October 2023. This rebound represents an approximate 20% increase since the beginning of the year, according to pricing data published by the U.S. Energy Information Administration. Commodity prices are expected to remain at levels that are supportive of investment in deepwater exploration and development projects. As of mid-April 2024, dated Brent crude oil prices for the remainder of 2024 and 2025 were in the low-to-middle $80-per-barrel range according to industry data.
In the first quarter of 2024, growth in offshore upstream capital expenditures continued to be supported by strong cash flows realized by oil and gas companies, continued expectations for growing demand, and breakeven costs well below current oil price forecasts. According to industry reports, analysts expect offshore upstream capital expenditures to increase approximately 3.3% annually, on average, from 2024 to 2027, rising to more than $230 billion by 2027, with exploration growing to approximately 12% of the capital expenditure total.
During the first quarter of 2024, the positive dynamics of increased offshore spending, coupled with the growing trend in long-cycle developments, production capacity expansions and exploration and appraisal activities, continued to drive growth in demand for floating drilling rigs. According to industry reports, on a trailing three-month basis, the volume of floating rig years contracted has grown month over month from November 2023 through February 2024, reaching its highest level since February 2023. According to data from S&P Global, in mid-April 2024 outstanding demand from floating rig tenders was approximately 56 rig years, compared to 42 rig years a year earlier, representing an increase of more than 33%. Most of this demand was concentrated in the deepwater and ultra-deepwater regions of the Gulf of Mexico, Brazil and West Africa, which are areas where we currently operate. The recent improvement in contracting activity has pushed dayrates for ultra-deepwater drilling rigs into the high $400 to low $500 thousand per day range.
This robust dayrate market, combined with anticipated growth in upstream capital spending, continues to drive further increases in rig demand and improves the economics for rig reactivations. However, supply chain constraints and inflationary pressures could limit the pace at which these additional rigs could return to the market, with some analysts estimating the average time for rig reactivations to be approximately 12 to 18 months, with costs approaching $100 million for idle rigs and $350 million for stranded rigs. The current inventory of idle rig capacity has decreased significantly and the owners of this remaining capacity have so far exhibited capital discipline as it relates to reactivation investments; however, the market could be adversely affected by the re-entry of this limited idle capacity.
Despite policy tightening by major central banks and a moderating pace of world economic expansion, inflationary pressures have generally remained elevated in the industry sector, though recent trends indicate possible moderation in some areas. Continued inflation may result in upward pressure on operating expenses for offshore drillers.
In addition to market factors, during the first quarter of 2024, customer capital allocation decisions have continued to affect demand for our services. Customer 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, during the first quarter, global energy demand continued to be strong and energy supply growth remained constrained. We expect increased investment in both traditional and renewable sources of energy to be required in the future, some of which we expect to be invested in finding and producing hydrocarbons in the offshore segment.
19
Industry experts continue to expect the world's demand for energy will increase and that hydrocarbons will continue to serve a major role in meeting the world's energy needs for the foreseeable future.
See “– Contract Drilling Backlog” for future commitments of our rigs during the remainder of 2024 through 2028.
20
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, 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, 2024 (based on information available at that time), January 1, 2024 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2023), and April 1, 2023 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023) (in millions).
|
|
April 1, |
|
|
January 1, |
|
|
April 1, |
|
|||
Contract Drilling Backlog (1) |
|
$ |
1,877 |
|
|
$ |
1,424 |
|
|
$ |
1,596 |
|
21
The following table reflects the amount of revenue related to our contract drilling backlog by year as of April 1, 2024 (in millions).
|
For the Year Ending December 31, |
|
||||||||||||||||
|
Total |
|
2024 (1) |
|
2025 |
|
2026 |
|
2027 |
|
2028 |
|
||||||
Contract Drilling Backlog (2) |
$ |
1,877 |
|
$ |
662 |
|
$ |
552 |
|
$ |
471 |
|
$ |
190 |
|
$ |
2 |
|
The following table reflects the percentage of rig days per year committed as of April 1, 2024. 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 Year Ending December 31, |
||||||||||||||||
|
|
2024 (1) |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|
2028 |
||||
Percentage of Rig Days Committed (2) |
|
|
88 |
% |
|
|
48 |
% |
|
|
41 |
% |
|
|
23 |
% |
|
<1% |
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 2024, we expect to incur approximately 220 days of planned downtime, including approximately (i) 100 days for a shipyard project, as well as mobilization and demobilization activities for the Ocean BlackRhino; (ii) 70 days for the Ocean GreatWhite’s lower marine riser package (or LMRP) repairs; (iii) 25 days for the Ocean Endeavor’s blowout preventer (or BOP) recertification; (iv) 20 days for the Ocean BlackHornet’s special survey and (v) five days for the Ocean Apex’s mobilization activities. 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. Under our primary insurance policies, which renewed effective May 1, 2024, we carry $50.0 million of U.S. Named Windstorm Coverage, as defined by the relevant insurance policy, for physical damage to our property and equipment with a $10.0 million deductible per accident or occurrence. We are self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico in excess of $50.0 million. 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 results of operations, financial condition, and cash flows. Under our current insurance policy, we carry physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of Mexico for which our deductible for physical damage is $10.0 million per occurrence. In addition, we currently carry loss-of-hire insurance on certain of our owned rigs to cover a portion of lost cash flow when a rig is damaged, which is a recoverable claim under the physical damage insurance but excludes 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 $2.5 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.
22
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, 2023.
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, 2024, December 31, 2023 and March 31, 2023.
Results for the Three-Month Periods Ended March 31, 2024, December 31, 2023 and March 31, 2023
|
|
Three Months Ended |
|
|||||||||
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||
|
|
2024 |
|
|
2023 |
|
|
2023 |
|
|||
Revenue-Earning Days (1) |
|
|
849 |
|
|
|
886 |
|
|
|
789 |
|
Utilization (2) |
|
|
68 |
% |
|
|
69 |
% |
|
|
63 |
% |
Average daily revenue (3) |
|
$ |
305,000 |
|
|
$ |
315,800 |
|
|
$ |
271,700 |
|
|
|
|
|
|
|
|
|
|
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|||
Contract drilling |
|
$ |
258,770 |
|
|
$ |
279,681 |
|
|
$ |
214,383 |
|
Revenues related to reimbursable expenses |
|
|
15,840 |
|
|
|
17,956 |
|
|
|
17,638 |
|
Total revenues |
|
|
274,610 |
|
|
|
297,637 |
|
|
|
232,021 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|||
Contract drilling, excluding depreciation |
|
|
184,205 |
|
|
|
188,803 |
|
|
|
173,490 |
|
Reimbursable expenses |
|
|
15,266 |
|
|
|
17,304 |
|
|
|
17,213 |
|
Depreciation |
|
|
31,354 |
|
|
|
27,705 |
|
|
|
27,906 |
|
General and administrative |
|
|
18,576 |
|
|
|
19,190 |
|
|
|
19,585 |
|
Loss (gain) on disposition of assets |
|
|
3,396 |
|
|
|
(280 |
) |
|
|
(1,213 |
) |
Total operating expenses |
|
|
252,797 |
|
|
|
252,722 |
|
|
|
236,981 |
|
Operating income (loss) |
|
|
21,813 |
|
|
|
44,915 |
|
|
|
(4,960 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|||
Interest income |
|
|
1,774 |
|
|
|
1,464 |
|
|
7 |
|
|
Interest expense |
|
|
(15,346 |
) |
|
|
(14,847 |
) |
|
|
(12,040 |
) |
Foreign currency transaction gain (loss) |
|
|
231 |
|
|
|
(2,863 |
) |
|
|
(1,271 |
) |
Other, net |
|
|
(71 |
) |
|
|
(54 |
) |
|
|
(152 |
) |
Income (loss) before income tax benefit |
|
|
8,401 |
|
|
|
28,615 |
|
|
|
(18,416 |
) |
Income tax benefit (expense) |
|
|
3,211 |
|
|
|
(174,317 |
) |
|
|
25,645 |
|
Net income (loss) |
|
$ |
11,612 |
|
|
$ |
(145,702 |
) |
|
$ |
7,229 |
|
|
|
|
|
|
|
|
|
|
|
|||
23
Three Months Ended March 31, 2024 Compared to Three Months Ended December 31, 2023
Contract Drilling Revenue. Contract drilling revenue decreased $20.9 million during the three months ended March 31, 2024 compared to the three months ended December 31, 2023, primarily due to lower average daily revenue earned ($9.2 million), combined with a 37-day decrease in R-E days ($11.7 million).
The decrease in average daily revenue during the first quarter of 2024, compared to the fourth quarter of 2023, was primarily due to the absence of incremental revenue recognized in the fourth quarter of 2023 related to favorable settlements with customers regarding equipment issues and non-productive time, which had occurred earlier in 2023, performance bonuses for the Ocean BlackHawk and Ocean BlackRhino and an early termination fee received by the Ocean Apex.
R-E days decreased during the first quarter of 2024, primarily due to downtime as a result of the Ocean GreatWhite being out of service and in shipyard for repairs due to the LMRP incident (60 fewer R-E days), termination of the managed services agreement and charter of the West Auriga (30 fewer days), warm stacking of the Ocean Patriot between contracts (29 fewer R-E days) and aggregate net incremental downtime for repairs for other rigs in our fleet (14 fewer R-E days). The decrease in R-E days was partially offset by nearly full-quarter operations for the Ocean Courage and Ocean BlackHawk in 2024 (96 incremental days), compared to the fourth quarter of 2023 when both rigs completed shipyard projects in advance of their current contracts.
Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation decreased $4.6 million during the first quarter of 2024, compared to the fourth quarter of 2023. Lower expense in the 2024 period was primarily due to reduced charter costs for the managed rigs ($13.0 million), as well as lower other operating expense for the West Auriga, primarily due to the termination of the rig’s MMSA at the end of February 2024 ($5.3 million) and the absence of expense associated with an annual efficiency bonus recognized in the fourth quarter of 2023 related to a services agreement for certain well control equipment on our drillships ($6.0 million). The reduction in costs between periods was partially offset by higher operating expenses for the Ocean BlackHawk and Ocean Courage ($10.6 million), which operated under contract for nearly a full quarter in 2024, compared to being in shipyard during portions of the fourth quarter of 2023, $7.6 million in non-recoverable expense (or a portion of the insurance deductible) associated with repairs for the Ocean GreatWhite attributable to the LMRP incident and a net increase in operating expense for the other rigs in our fleet ($1.5 million).
Loss on disposition of assets. We recorded a net loss on disposition of assets of $3.4 million for the first quarter of 2024, which included $2.4 million in non-recoverable expense (or a portion of the insurance deductible) associated with capital repairs for the Ocean GreatWhite.
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. We exclude discrete tax adjustments from the computation of the AETR and record such adjustments in the quarter in which they occur.
We recorded a net income tax benefit of $3.2 million for the three months ended March 31, 2024. For the three months ended December 31, 2023, we recorded a net income tax expense of $174.3million. The effective tax rate for the quarter ended March 31, 2024 resulted from the mix of pre-tax income and loss across jurisdictions, increased profitability in jurisdictions which rigs are currently operating, and the effect of discrete items, specifically a benefit on remeasurement of uncertain tax positions in Egypt.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Contract Drilling Revenue. Contract drilling revenue increased $44.4 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to higher average daily revenue earned ($28.2 million), in addition to a 60-day increase in R-E days ($16.2 million).
24
Average daily revenue earned during the first quarter of 2024 increased, compared to the first quarter of 2023, primarily due to higher dayrates earned by several rigs in the fleet, which operated under new contracts or extensions that commenced after the first quarter of 2023.
R-E days increased during the first quarter of 2024, compared to the first quarter of 2023, primarily due to incremental operating days for the Ocean Endeavor, which completed shipyard repairs in the first quarter of 2023, and the West Vela, which was warm stacked between contracts during the first quarter of 2023 (105 incremental days). The increase in R-E days during the 2024 period was partially offset by a net increase in downtime for repairs (20 fewer R-E days), the warm-stacking of rigs between contracts (26 fewer R-E days) and termination of the MMSA for the West Auriga (23 fewer R-E days). Comparing the quarters, the Ocean GreatWhite had achieved 24 incremental R-E days prior to going out of service for repairs as a result of the LMRP incident during the first quarter of 2024.
Contract Drilling Expense, Excluding Depreciation. Contract drilling expense, excluding depreciation increased $10.7 million during the first quarter of 2024, compared to the first quarter of 2023 and reflected higher net expense for the managed rigs ($5.8 million), primarily due to higher charter fees for both managed rigs, partially offset by lower repair and maintenance costs for the West Vela, and also included $7.6 million in non-recoverable expense (or a portion of the insurance deductible) associated with repairs for the Ocean GreatWhite. Comparing the periods, contract drilling expense was reduced by a net decrease in other operating costs across our owned rig fleet ($2.7 million) during the first quarter of 2024.
Interest Expense. Interest expense increased $3.3 million during the first quarter of 2024, primarily due to higher average debt outstanding compared to the first quarter of 2023. Interest expense for the first quarter of 2024 included $12.2 million in expense related to our $550.0 million aggregate principal amount of senior secured second lien notes (or the Second Lien Notes), which bear interest at 8.5%, and the amortization of associated debt issuance costs. During the first quarter of 2023, we incurred interest expense of $8.8 million on weighted average debt outstanding of approximately $354.0 million at an average interest rate of 9.5%, in addition to amortization of associated debt issuance costs and debt premium.
Loss (gain) on disposition of assets. We recorded a net loss on disposition of assets of $3.4 million for the first quarter of 2024, which included $2.4 million in non-recoverable expense (or a portion of the insurance deductible) associated with capital repairs for the LMRP and related equipment on the Ocean GreatWhite. During the first quarter of 2023, we recognized a $1.2 million gain on disposition of surplus equipment.
Income Tax Benefit. We recorded a net income tax benefit of $3.2 million for the three months ended March 31, 2024, inclusive of a $12.2 million tax benefit on the revaluation of unrecognized tax liabilities in Egypt due to the significant weakening of the Egyptian pound. For the three months ended March 31, 2023, we recorded a net income tax benefit of $25.6 million. The effective tax rate for the three months ended March 31, 2024 was the result of the mix of pre-tax income and loss across jurisdictions, increased profitability in jurisdictions which rigs are currently operating, and the effect of discrete items, specifically a benefit on remeasurement of uncertain tax positions in Egypt.
Liquidity and Capital Resources
We have available a senior secured revolving credit agreement, which provides for a $300.0 million senior secured revolving credit facility (or the RCF). The RCF is scheduled to mature on April 22, 2026. See Note 6 “Long-Term Debt” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our RCF.
At May 6, 2024, we had no borrowings outstanding under the RCF, and a $1.9 million letter of credit had been issued thereunder. As of May 6, 2024, approximately $298.1 million was available for borrowings under the RCF subject to its terms and conditions; however, the availability of borrowings under the RCF is subject to the satisfaction of certain conditions as specified in our revolving credit agreement, including restrictions on borrowings.
There is no capacity for the issuance of new letters of credit under the RCF, but the RCF permits us to obtain up to $50.0 million in letters of credit outside the RCF. We have obtained a $25.0 million letter of credit facility; however, letters of credit thereunder must be cash collateralized.
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 6, 2024, all of our rigs, excluding the managed rig, are
25
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, 2024, our contractual backlog was approximately $1.9 billion. At March 31, 2024, we had cash of $169.2 million, including $6.8 million that is subject to restrictions pursuant to the MMSA.
Sources and Uses of Cash
Cash Flows and Cash Expenditures
For the three-month period ended March 31, 2024, our operating activities generated cash of $59.0 million. Cash receipts from contract drilling services ($315.7 million) were partially offset by cash expenditures for contract drilling, shorebase support, and general and administrative costs ($256.6 million).
Cash outlays for capital expenditures during the first three months of 2024 aggregated $27.9 million, primarily related to long-lead items for the Ocean BlackRhino’s shipyard project and equipment updates scheduled for the second half of 2024. We also made payments of $4.3 million under finance lease obligations related to well control equipment on our owned drillships.
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 RCF and made payments in connection with finance lease obligations aggregating $4.1 million related to our owned drillships.
Ocean GreatWhite
On February 1, 2024, the Ocean GreatWhite, reported an equipment incident while located in the North Sea west of the Shetland Islands. The rig’s lower marine riser package (“LMRP”) and deployed riser string unintentionally separated from the rig at the slip joint tensioner ring and the LMRP and riser dropped to the seabed. We have safely recovered the LMRP from the seabed and are in a repair facility in Kishorn port, where repairs to the LMRP and any related work are underway.
We anticipate that the LMRP incident will be covered by our hull & machinery insurance policy and that all incremental costs, less our $10.0 million deductible, will be reimbursable under that policy. In addition, we carry loss-of-hire insurance on the Ocean GreatWhite to cover a portion of lost cash flow under certain circumstances. After a 60-day waiting period, our loss-of-hire insurance provides $150,000 per day, for up to 180 days, for each day of lost revenue as a result of a covered property loss claim. As of the date of this report, we estimate the cash flow impact of direct and incremental recovery, repairs and maintenance costs, and replacement capital expenditures, offset by loss of hire insurance, to be approximately $25.0 million to $30.0 million dollars. However, we cannot fully predict the extent of such insurance coverage or the timing of such claims.
26
Capital Expenditures and Other Projects
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 total capital expenditures for 2024 to be approximately $135.0 million to $145.0 million.
Other Obligations
As of March 31, 2024, the amount of total net unrecognized tax benefits related to uncertain tax positions that could result in a future cash payment was $40.3 million. Due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities recognized in these balances, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Included in the balance is $21.0 million related to prior years’ operations in Egypt.
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:
27
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These types of statements are based on current expectations about future events and inherently are subject to a variety of assumptions, risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those expected, projected or expressed in forward-looking statements. These risks and uncertainties include, among others, those described or referenced in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
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. From time to time, we may have exposure to interest rate risk on our debt instruments that may arise from changes in the level or volatility of interest rates. As of March 31, 2024, we had no variable rate debt outstanding. Our Second 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, 2024. 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, 2023 for further information.
ITEM 4. Controls and Procedures.
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the federal securities laws, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us under the federal securities laws is accumulated and communicated to our management on a timely basis to allow decisions regarding required disclosure.
Our Chief Executive Officer (or CEO) and Chief Financial Officer (or CFO) participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules
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13a-15(e) and 15d-15(e)) as of March 31, 2024. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2024.
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 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Information related to certain legal proceedings is included in Note 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, 2023 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, 2023 are incorporated herein by reference. No material changes have been made to such risk factors as of March 31, 2024.
ITEM 5. Other Information.
Items 5(a) and 5(b) are not applicable.
(c)
On
On
During the quarter ended March 31, 2024, no
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ITEM 6. Exhibits.
Exhibit No. |
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Description of Exhibit |
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3.1 |
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3.2 |
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10.1 |
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Form of 2024 Time-Vesting Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K filed on February 28, 2024). |
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10.2 |
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31.1* |
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Rule 13a-14(a) Certification of the Chief Executive Officer. |
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31.2* |
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Rule 13a-14(a) Certification of the Chief Financial Officer. |
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32.1* |
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Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
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101.INS* |
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Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Document. |
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104* |
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The cover page of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL (included with the Exhibit 101 attachments). |
* Filed or furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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DIAMOND OFFSHORE DRILLING, INC. |
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(Registrant) |
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Date May 8, 2024 |
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By: |
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/s/ Dominic A. Savarino |
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Dominic A. Savarino |
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Senior Vice President and Chief Financial Officer |
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