United states securities and exchange commission

 

The decrease in direct rig related operating expenses per day for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was attributable to lower costs from the higher number of idle drillships and the continued benefits of our cost saving measures.

General and administrative expenses . The increase in general and administrative expenses for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was primarily due to higher legal costs associated with the patent litigation and arbitration proceeding, and legal and advisory expenses related to our debt restructuring efforts incurred prior to the Petition Date. Such legal and advisory expenses were $30.7 million for the year ended December 31, 2017, as compared to $16.9 million for the same period in 2016. Additionally, the increase was a result of severance related costs and timing of expense recognition of incentive awards, including certain performance-based awards.

Depreciation expense . Depreciation expense for the year ended December 31, 2017 was comparable to the same period in 2016.

Interest expense . The decrease in interest expense for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was primarily due to interest expense not accrued subsequent to the Petition Date of $12.0 million for the 2017 Senior Secured Notes, the 2020 Senior Secured Notes and the Senior Secured Term Loan B, that we believe are not probable of being treated as an allowed claim in the Chapter 11 proceedings, partially offset by higher amortization of deferred financing costs prior to the Petition Date.

Write-off of deferred financing costs . During the year ended December 31, 2017, we expensed $30.8 million of deferred financing costs previously recorded within our consolidated balance sheets as a result of the filing of the Bankruptcy Petitions . See Note 6 to our consolidated financial statements.  

Gain on debt extinguishment . During the year ended December 31, 2016, we repurchased $60.6 million of our 2017 Senior Secured Notes for a purchase price of $23.6 million plus accrued interest. We recorded the resulting gain,
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net of the corresponding unamortized deferred financing costs and debt discount, of $36.2 million as a gain on debt extinguishment on our statements of operations.

Reorganization items . During the year ended December 31, 2017, we classified all income, expenses, gains or losses that were incurred or realized subsequent to the Petition Date and as a result of the Chapter 11 proceedings as reorganization items, which primarily consisted of professional fees. See Note 2 to our consolidated financial statements.

Other expense . During the year ended December 31, 2017, we recognized an other-than-temporary impairment in our Hyperdynamics available-for-sale securities of $6.8 million. See Note 11 to our consolidated financial statements. This increase in other expense was partially offset by higher interest income from cash equivalents. The remaining change was due to currency exchange fluctuations.

Income taxes .  The decrease in income tax expense was primarily due to a decrease in operating activity in 2017 and lower dayrates on recently secured contracts. The decrease was partially offset by the reduction of deferred tax assets as the result of U.S. tax legislation enacted in December 2017 and the write-off of deferred tax assets related to deferred compensation benefits that expired unused. We do not expect the newly enacted U.S. tax legislation to have a material impact on our income tax expense in future years.

The relationship between our provision for or benefit from income taxes and our pre-tax book income can vary significantly from period to period considering, among other factors, (a) the overall level of pre-tax book income, (b) changes in the blend of income that is taxed based on gross revenues or at high effective tax rates versus pre-tax book income or at low effective tax rates and (c) our rig operating structures. Consequently, our income tax expense does not necessarily change proportionally with our pre-tax book income. Significant decreases in our pre-tax book income typically result in higher effective tax rates, while significant increases in pre-tax book income can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above. Additionally, pre-tax book losses typically result in negative effective tax rates. During the years ended December 31, 2017 and 2016, our effective tax rate was (2.5)% and (146.9)%, respectively.

The change in our effective tax rate for the year ended December 31, 2017, as compared to the year ended December 31, 2016 was the result of our idle drillships and lower dayrates, which are generating larger losses in 2017 as compared to 2016 for which no tax benefit is expected.

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:

		Years Ended December 31,
		2016			2015			Change			% Change
		(in thousands, except percentages)
Revenues
Contract drilling		$	769,472		$	1,085,063		$	(315,591)		29%
Costs and expenses
Operating expenses			(290,038)			(431,261)			141,223		33%
General and administrative expenses			(63,379)			(55,511)			(7,868)		14%
Depreciation expense			(275,901)			(243,457)			(32,444)		13%
Loss from construction contract rescission			—			(40,155)			40,155		100%
Operating income			140,154			314,679			(174,525)		55%
Other income (expense)
Interest expense			(189,044)			(156,361)			(32,683)		21%
Gain on debt extinguishment			36,233			—			36,233		100%
Other expense			(2,393)			(3,217)			824		26%
Income (loss) before income taxes			(15,050)			155,101			(170,151)		110%
Income tax expense			(22,107)			(28,871)			6,764		23%
Net income (loss)		$	(37,157)		$	126,230		$	(163,387)		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.

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:

		Years Ended December 31,
		2016			2015
		(in   thousands)
Direct rig related operating expenses, net		$	228,934		$	345,504
Reimbursable costs			18,362			27,286
Shore-based and other support costs			28,797			32,520
Amortization of deferred costs			13,945			25,951
Total		$	290,038		$	431,261

 

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 offhire rig days were as follows:

		Years Ended December 31,
		2016			2015
		(in thousands, amounts per rig per day)
Direct rig related operating expenses, net		$	89.7		$	149.1
Shore-based and other support costs			11.2			14.0
Total		$	100.9		$	163.1