Results of Operations
Year ended December 31, 2016 compared to Year ended December 31, 2015
The following table provides a comparison of our consolidated results of operations for the years ended December 31, 2016 and 2015:
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Years Ended December 31,
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2016
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2015
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Change
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% Change
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(in thousands, except percentages)
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Revenues
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Contract drilling
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$
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769,472
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$
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1,085,063
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$
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(315,591)
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29%
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Costs and expenses
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Operating expenses
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(290,038)
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(431,261)
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141,223
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33%
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General and administrative expenses
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(63,379)
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(55,511)
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(7,868)
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14%
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Depreciation expense
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(275,901)
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(243,457)
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(32,444)
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13%
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Loss from construction contract rescission
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—
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(40,155)
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40,155
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100%
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Operating income
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140,154
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314,679
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(174,525)
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55%
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Other income (expense)
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Interest expense
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(189,044)
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(156,361)
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(32,683)
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21%
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Gain on debt extinguishment
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36,233
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—
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36,233
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100%
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Other expense
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(2,393)
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(3,217)
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824
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26%
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Income (loss) before income taxes
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(15,050)
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155,101
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(170,151)
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110%
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Income tax expense
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(22,107)
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(28,871)
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6,764
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23%
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Net income (loss)
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$
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(37,157)
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$
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126,230
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$
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(163,387)
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129%
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Revenues. The decrease in revenues for the year ended December 31, 2016, as compared to the year ended December 31, 2015, resulted primarily from the Pacific Mistral and the Pacific Khamsin completing their contracts in February and December 2015, respectively, without any follow-on work, the Pacific Bora completing its contract in September 2016, and the Pacific Scirocco being on an 80% standby rate from May 2016 to October 2016. The decrease was partially offset by higher revenue efficiency for our operating rigs. On December 17, 2016, the Pacific Scirocco completed all contractual obligations for Total, which resulted in recognizing revenue at 80% of its operating dayrate of $489,000 for the remaining contractual days through January 19, 2017 in addition to the $3.0 million demobilization fee provided under the contract.
During the year ended December 31, 2016, our operating fleet of drillships increased average revenue efficiency to 98.2%, as compared to 94.7% during the year ended December 31, 2015.
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Contract drilling revenue for the years ended December 31, 2016 and 2015 also included amortization of deferred revenue of $67.1 million and $86.3 million and reimbursable revenues of $19.0 million and $28.8 million, respectively. The decrease in the amortization of deferred revenue was primarily due to completion of the primary contract terms for the Pacific Mistral in February 2015 and the Pacific Khamsin in December 2015. On December 9, 2016, we entered into a contract amendment with Chevron to change the contract end date for the Pacific Santa Ana from April 28, 2017 to January 31, 2017 in exchange for a fee of $35.2 million. This fee was recognized ratably over the remaining term of the amended contract from December 9, 2016 to January 31, 2017 and partially offset the overall decrease in the amortization of deferred revenue.
Operating expenses. The following table summarizes operating expenses:
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Years Ended December 31,
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2016
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2015
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(in thousands)
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Direct rig related operating expenses, net
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$
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228,934
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$
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345,504
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Reimbursable costs
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18,362
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27,286
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Shore-based and other support costs
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28,797
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32,520
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Amortization of deferred costs
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13,945
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25,951
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Total
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$
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290,038
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$
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431,261
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The decrease in direct rig related operating expenses for the year ended December 31, 2016, as compared to the year ended December 31, 2015, resulted from lower operating costs for the Pacific Mistral , the Pacific Khamsin and the Pacific Bora subsequent to completion of their respective contracts and cost saving measures implemented for both operating and idle drillships.
Reimbursable costs are not included under the scope of the drilling contract’s initial dayrate, but are subject to reimbursement from our clients. Reimbursable costs can be highly variable between quarters. Because the reimbursement of these costs by our clients is recorded as additional revenue, they do not generally negatively affect our margins.
The decrease in amortization of deferred costs was primarily due to completion of the primary contract term for the Pacific Mistral in February 2015 and for the Pacific Khamsin in December 2015.
Direct rig related operating expenses and shore-based and other support costs divided by the number of operating and idle rig days were as follows:
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Years Ended December 31,
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2016
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2015
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(in thousands, amounts per rig per day)
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Direct rig related operating expenses, net
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$
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89.7
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$
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149.1
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Shore-based and other support costs
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11.2
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14.0
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Total
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$
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100.9
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$
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163.1
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The decrease in direct rig related operating expenses per operating and idle rig per day for the year ended December 31, 2016, as compared to the same period in 2015, was attributable to lower costs on idle drillships and fleet wide cost saving measures implemented.
The decrease in shore-based and other support costs per operating and idle rig per day for the year ended December 31, 2016, as compared to the same period in 2015, was due to reductions in Brazil and Nigeria office costs, and the implementation of cost saving measures.
General and administrative expenses . The increase in general and administrative expenses for the year ended December 31, 2016, as compared to the year ended December 31, 2015, resulted from legal costs associated with the arbitration proceeding and patent litigation, and legal and advisory fees related to our on-going debt restructuring efforts. Such expenses were $16.9 million for the year ended December 31, 2016, as compared to $2.4 million for the same period in 2015. Such legal and advisory expenses are not expected to continue beyond the resolution of the underlying matters. This increase in general and administrative expenses was partially offset by our cost saving measures.
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Depreciation expense . The increase in depreciation expense for the year ended December 31, 2016, as compared to the same period in 2015, related to depreciation expense incurred on the Pacific Meltem , after being placed into service on August 25, 2015.
Loss on construction contract rescission . We recognized a $40.2 million loss in 2015 in connection with the rescission of the Construction Contract for the Pacific Zonda . See Note 4 to the Company’s Consolidated Financial Statements in this annual report for additional information.
Interest expense . The following table summarizes interest expense:
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Years Ended December 31,
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2016
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2015
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(in thousands)
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Interest
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$
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(181,041)
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$
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(183,800)
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Realized losses on interest rate swaps
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(8,003)
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(9,643)
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Capitalized interest
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—
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37,082
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Interest expense
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$
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(189,044)
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$
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(156,361)
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