United states securities and exchange commission

 

The decrease in net cash provided by operating activities resulted primarily from reduced revenue from our fleet, partially offset by cost saving measures and a $35.2 million fee received from Chevron for the contract amendment of the Pacific Santa Ana for the year ended December 31, 2016.

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The following table provides a comparison of our net cash used in investing activities for the years ended December 31, 2016 and 2015:

		Years Ended December 31,
		2016			2015			Change
		(in thousands)
Cash flow from investing activities:
Capital expenditures		$	(52,625)		$	(181,458)		$	128,833
Net cash used in investing activities		$	(52,625)		$	(181,458)		$	128,833

 

The decrease in capital expenditures resulted primarily from no newbuild drillship construction activities in 2016 and fleet wide cost control measures implemented. Capital expenditures for the year ended December 31, 2016 primarily consisted of the purchases of fleet spare equipment committed to in prior years to support our operations.

The following table provides a comparison of our net cash provided by (used in) financing activities for the years ended December 31, 2016 and 2015:

		Years Ended December 31,
		2016			2015			Change
		(in thousands)
Cash flow from financing activities:
Payments for shares issued under share-based compensation plan		$	(89)		$	(536)		$	447
Proceeds from long-term debt			450,000			315,000			135,000
Payments on long-term debt			(110,832)			(581,083)			470,251
Payments for financing costs			(25,423)			(4,070)			(21,353)
Purchases of treasury shares			—			(21,760)			21,760
Net cash provided by (used in) financing activities		$	313,656		$	(292,449)		$	606,105

 

The increase in cash from financing activities for the year ended December 31, 2016, as compared to the same period in 2015, resulted from higher drawdowns, lower scheduled debt payments and no share repurchases, partially offset by financing costs to amend the indenture governing the 2017 Senior Secured Notes in October 2016 and repurchases of our 2017 Senior Secured Notes. During the year ended December 31, 2016, we drew an aggregate of $450.0 million under the 2013 Revolving Credit Facility. During the year ended December 31, 2015, we drew $50.0 million under the 2013 Revolving Credit Facility, and completed the final drawdowns in the amount of $85.0 million under the SSCF.

Description of Indebtedness

See Note 6 to our consolidated financial statements for additional information.

Customs bonds

As of December 31, 2017, we were contingently liable under certain customs bonds totaling approximately $43.0 million issued as security in the normal course of our business. See Note 14 to our consolidated financial statements.

Derivative Instruments and Hedging Activities

We may enter into derivative instruments from time to time to manage our exposure to fluctuations in interest rates and foreign exchange rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain transactions may not meet the criteria for hedge accounting. See Note 12 to our consolidated financial statements.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

We do not undertake any significant expenditure on research and development. Additionally, we have no significant interests in patents or licenses.

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D. TREND INFORMATION

Historically, operating results in the offshore contract drilling industry have been cyclical and directly related to the demand for and the available supply of drilling rigs, which are influenced by various factors. Brent crude prices declined from highs above $100 per barrel in mid-2014 to lows below $40 per barrel in late 2015 and early 2016, before generally rising during the remainder of 2016 and 2017 to approximately $65 per barrel at the end of 2017. Although dayrates and utilization for modern drillships have in the past been less sensitive to short-term oil price movements than those of older or less capable drilling rigs, the sustained decline in oil prices from 2014 levels has rendered many deepwater projects less attractive to our customers and significantly impacted the number of projects available for modern drillships.

Drilling Rig Supply

Across the industry, there have been no orders placed since April 2014 to build additional semi-submersibles or drillships, and within the last year, there have been several delays in delivery dates and canceled orders for new drillships. We estimate there are approximately 13 high-specification floating rigs delivered or scheduled for delivery from January 1, 2018 until the end of 2018, at least seven of which have not yet been announced as being under contract for clients. Additionally, as a result of significantly reduced contracting activity, 55 to 60 rigs in the high-specification floating rig industry sector have been removed from the actively marketed fleet through cold stacking or scrapping since early 2014. This trend, along with additional delays in delivery dates and cancellations of existing orders for floating rigs, could continue as the offshore drilling market remains weak. The supply of high-specification floating rigs through the end of 2018 can be estimated as a range between 100 and 115. Although we have visibility of the maximum number of high-specification floating rigs that could be available, we cannot accurately predict how many of those rigs will be actively marketed or how many of those rigs may be temporarily or permanently removed from the market.

Drilling Rig Demand

Demand for our drillships is a function of the worldwide levels of offshore exploration and development spending by oil and gas companies, which has decreased or been delayed significantly as a result of the sustained weakness in oil prices. The type of projects that modern drillships undertake are generally located in deeper water, in more remote locations, and are more capital intensive and longer lasting than those of older or less capable drilling rigs. The drilling programs of oil and gas companies are also affected by the global economic and political climate, access to quality drilling prospects, exploration success, perceived future availability and lead time requirements for drilling equipment, advances in drilling technology, and emphasis on deepwater and high-specification exploration and production versus other areas.

Overall, 2017 saw an improving pace for high-specification floating rig contracting activity with about 34 rig years contracted. Approximately 12 rig years were contracted for the high-specification floating rig fleet industry-wide in 2016, compared to 30 rig years in 2015 and an average of 117 rig years per year from 2012 to 2014. Additionally, seven drilling contracts for high-specification floating rigs were canceled in 2017, with all receiving early termination payments of varying amounts. We expect contracting activity to continue to improve; however, no assurances can be given as to the scope, pace or duration of any recovery.

Supply and Demand Balance

Since the start of the market downturn in 2014, capital expenditure budgets have significantly declined for many exploration and production companies. We estimate that through the end of 2018, approximately 45 to 50 high-specification floating rigs without currently confirmed client contracts will be available to commence operations. Additionally, multiple older, lower-specification drillships and mid-water semisubmersibles have recently completed contracts without follow-on contracts. The imbalance of supply and demand has resulted in significantly lower dayrates. While recent scrapping and cold stacking of older assets have lowered the total rig supply, supply of drilling rigs continues to exceed demand. We believe that, if the recent improvement in oil prices is sustained and reduction in rig supply continues, the industry will be able to rebalance its global fleet. Based on the current trend, we expect the utilization of high-specification floating rigs to improve over the next few years.

For more information on this and other risks to our business and our industry, please read Item 3.D., “Risk Factors” of this annual report.

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E. OFF-BALANCE SHEET ARRANGEMENTS

Currently, we do not have any off-balance sheet arrangements.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The table below sets forth our contractual obligations as of December 31, 2017:

Contractual Obligations		2018			2018-2019			2020-2021			Thereafter			Total
		(in thousands)
Long-term debt (a)		$	3,043,967		$	—		$	—		$	—		$	3,043,967
Interest on long-term debt (b)			43,623			13,871			—			—			57,494
Operating leases			2,221			4,293			4,387			3,961			14,862
Purchase obligations (c)			12,110			—			—			—			12,110
Total contractual obligations (d)		$	3,101,921		$	18,164		$	4,387		$	3,961		$	3,128,433

	(a)		Amounts are based on principal balances of the 2013 Revolving Credit Facility, the SSCF, the 2017 Senior Secured Notes, the 2020 Senior Secured Notes and the Senior Secured Term Loan B. As a result of our filing of the Bankruptcy Petitions on November 12, 2017, the full amounts of our long-term debt were automatically accelerated and are currently due and payable, but have been stayed subject to settlement under the Bankruptcy Code.
	(b)		Interest payments are based solely on our outstanding borrowings under the 2013 Revolving Credit Facility and the SSCF as of December 31, 2017. Interest payments calculated exclude outstanding borrowings from the 2017 Senior Secured Notes, the 2020 Senior Secured Notes and the Senior Secured Term Loan B, as the interest payments ceased to accrue subsequent to the Petition Date and are not expected to be an allowed claim in the Chapter 11 proceedings. For variable rate LIBOR based debt, interest has been calculated using LIBOR as of December 31, 2017.
	(c)		Purchase obligations are agreements to purchase goods and services that are enforceable and legally binding, that specify all significant terms, including the quantities to be purchased, price provisions and the approximate timing of the transactions, which includes our purchase orders for goods and services entered into in the normal course of business.
	(d)		Contractual obligations do not include approximately $ 38.9 million of liabilities from unrecognized tax benefits related to uncertain tax positions, inclusive of interest and penalties, included on our consolidated balance sheets as of December 31, 2017. We are unable to specify with certainty the future periods in which we may be obligated to settle such amounts.

Some of the figures included in the table above are based on estimates and assumptions about these obligations, including their duration and other factors. The contractual obligations we will actually pay in future periods may vary from those reflected in the tables.

G. SAFE HARBOR

See “Forward-Looking Statements” in this annual report for additional information.

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT