ITEM 1. BUSINESS.
GENERAL
We are a leading provider of diversified services for the oil and gas industry. We perform contract drilling services with our fleet of 60 offshore drilling units located in key markets worldwide. This fleet consists of 13 semisubmersibles (including five Noble EVA-4000TM semisubmersibles and four ultra-deepwater hulls), three dynamically positioned drillships, 41 jackup rigs and three submersibles. For additional information on the specifications of the fleet, see “Item 2.
ITEM 2. PROPERTIES.
DRILLING FLEET
Our offshore drilling rig fleet consists of 60 units composed of 13 semisubmersibles (including five Noble EVA-4000™ semisubmersibles and four ultra-deepwater hulls), three drillships, 41 jackup rigs and three submersibles. The rig count includes one drillship and one jackup unit in which we have partial ownership interests through joint ventures and one jackup rig operated pursuant to a lease (“bareboat charter”) agreement. Each type of rig is described further below. There are several factors that determine the type of rig most suitable for a particular job, the most significant of which include the water depth and bottom conditions at the proposed drilling location, whether the drilling is being done over a platform or other structure, and the intended well depth.
Semisubmersibles
Our semisubmersible fleet consists of 13 units. Among the 13 are five units that have been converted to Noble EVA-4000™ semisubmersibles and three Friede & Goldman 9500 Enhanced Pacesetter semisubmersibles (two of which require substantial capital expenditure upgrades to place in operational condition). Also included in this fleet are two Pentagone 85 semisubmersibles, two Bingo 9000 baredeck hulls, and one semisubmersible capable of operating in harsh environments. Semisubmersibles are floating platforms which, by means of a water ballasting system, can be submerged to a predetermined depth so that a substantial portion of the hull is below the water surface during drilling operations. These units maintain their position over the well through the use of either a fixed mooring system or a dynamic positioning system and can drill in many areas where jackup rigs can also drill. However, semisubmersibles normally require water depth of at least 200 feet in order to conduct operations. Our semisubmersibles are designed to work in water depths of up to 10,000 feet, depending on the unit. Semisubmersibles are typically more expensive to construct and operate than jackup rigs. One of our Friede & Goldman 9500 Enhanced Pacesetter semisubmersibles, the Noble Clyde Boudreaux, received a commitment in December 2004 from Shell Exploration & Production Company for a two-year contract. Upon completion of capital upgrades, which are estimated to be completed in the third quarter of 2006, the unit will be capable of drilling in water depths up to 10,000 feet.
We have extended the water depth capability of certain of our semisubmersibles and dynamically positioned drillships discussed below by the deployment of our proprietary aluminum alloy riser (see “Item 1. Business-Business Development During 2004”).
Dynamically Positioned Drillships
We have three dynamically positioned drillships in the fleet. Drillships are ships that are equipped for drilling and are typically self-propelled. Our drillships are positioned over the well through the use of a computer controlled dynamic positioning system. Our two wholly-owned drillships, the Noble Leo Segerius and Noble Roger Eason, are capable of drilling in water depths up to 5,900 feet and 7,200 feet, respectively. The Noble Muravlenko,
in which we own an 82 percent interest through a joint venture, is capable of drilling in water depths up to 4,800 feet.
Jackup Rigs
We have 41 jackup rigs in the fleet, including one in which we own a 50 percent interest through a joint venture and one that we operate pursuant to a bareboat charter agreement. Jackup rigs are mobile, self-elevating drilling platforms equipped with legs which can be lowered to the ocean floor until a foundation is established to support the drilling platform. The rig hull includes the drilling rig, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. All of our jackup rigs are independent leg (i.e., the legs can be raised or lowered independently of each other), cantilevered rigs, and the Noble Mark Burns is under conversion. We acquired the Noble Mark Burns in June 2004 and are upgrading the unit to 300 feet water depth capability, a 65 foot cantilever, a third mud pump, and quarters expansion for 160 personnel. A cantilevered jackup has a feature that permits the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over pre-existing platforms or structures. Moving a rig to the drill site involves jacking up its legs until the hull is floating on the surface of the water. The hull is then towed to the drill site by tugs and the legs are jacked down to the ocean floor. The jacking operation continues until the hull is raised out of the water and drilling operations are conducted with the hull in its raised position. Our jackup rigs are capable of drilling to a maximum depth of 25,000 feet in water depths ranging between eight and 390 feet, depending on the jackup rig.
Submersibles
We have three submersibles in the fleet. Submersibles are mobile drilling platforms which are towed to the drill site and submerged to drilling position by flooding the lower hull until it rests on the sea floor, with the upper deck above the water surface. Our submersibles are capable of drilling to a maximum depth of 25,000 feet in water depths ranging between 12 and 85 feet, depending on the submersible.
The following table sets forth certain information concerning our drilling rig fleet at February 28, 2005. The table does not include any rigs owned by operators for which we had labor contracts or letters of intent as of February 28, 2005. We operate and, unless otherwise indicated, own all of the rigs included in the table. All of our rigs are equipped with top drives.
Drilling Fleet
See footnotes on the following page.
Footnotes to Drilling Fleet
(1)
Rigs designated with an “R” were modified, refurbished or otherwise upgraded in the year indicated by capital expenditures in an amount deemed material by management.
(2)
Rigs listed as “active” were operating under contract; rigs listed as “available” were available for bidding; rigs listed as “contracted” have signed contracts or have letters of intent with operators but have not begun operations; rigs listed as “shipyard” are in a shipyard for repair, refurbishment or upgrade.
(3)
Water depth rating is pursuant to the use of Noble’s proprietary aluminum alloy riser. For additional information regarding units on which the aluminum alloy riser is or will be deployed, see “Item 1.Business-Business Developments During 2004.”
(4)
Harsh environment capability.
(5)
Water depth rating is subsequent to the rig’s planned upgrade. The Noble Bingo 9000 Rig 3 and Noble Bingo 9000 Rig 4 are baredeck hulls.
(6)
We operate the unit and own an 82 percent interest in the unit through a joint venture.
(7)
Although designed for a water depth rating of 390 feet of water in a non-harsh environment, the rig is currently equipped with legs adequate to drill in approximately 180 feet of water. We own the additional legs required to extend the drilling depth capability to 390 feet of water.
(8)
We operate the unit pursuant to a bareboat charter agreement.
(9)
Although designed for a water depth rating of 300 feet of water, the rig is currently equipped with legs adequate to drill in approximately 250 feet of water. We own the additional legs required to extend the drilling depth capability to 300 feet of water.
(10)
We own a 50 percent interest in the unit through a joint venture.
(11)
Although designed for a water depth rating of 300 feet of water, the rig is currently equipped with legs adequate to drill in approximately 250 feet of water. The estimated cost of adding the additional leg capacity is $2,500,000.
FACILITIES
Our principal executive offices are located in Sugar Land, Texas, and are leased through June 2011. We also lease administrative and marketing offices, and sites used primarily for storage, maintenance and repairs for drilling rigs and equipment, in Zug, Switzerland; Sugar Land, Texas; New Orleans, Louisiana; Leduc, Alberta and St. John’s, Newfoundland, Canada; Lagos and Port Harcourt, Nigeria; Aberdeen, Scotland; Stavanger, Norway; Ciudad Ojeda, Venezuela; Del Carmen, Mexico; Doha, Qatar; Abu Dhabi and Dubai, U.A.E.; Beverwijk and Den Helder, The Netherlands; Macae, Brazil; Celle, Germany; Moscow, Russia; and Esjberg, Denmark. We own certain tracts of land, including office and administrative buildings and warehouse facilities in Bayou Black, Louisiana and Aberdeen, Scotland.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In August 2004, an indirect, wholly-owned subsidiary of Noble was served as a named defendant in two lawsuits filed in the Circuit Courts of the State of Mississippi involving numerous other companies (not affiliated with Noble) as co-defendants. In December 2004, such subsidiary was served as a named defendant in a third lawsuit filed in Mississippi Circuit Court. The lawsuits seek an unspecified amount of monetary damages on behalf of approximately 130 named individuals alleging personal injury or death, including claims under the Jones Act, purportedly resulting from exposure to asbestos on drilling rigs and associated facilities during the period 1965 through 1986. The lawsuits are in preliminary stages and we have not confirmed the number of plaintiffs, if any, that were employed by our subsidiary or otherwise associated with our drilling operations during the relevant period. We intend to defend vigorously against the litigation, and based on information currently available, we do not believe the resolution of these lawsuits will have a material adverse effect on our financial position, results of operations or cash flows.
Noble Asset Company Limited (“NACL”), a wholly-owned, indirect subsidiary of Noble, was named one of 21 parties served a Show Cause Notice issued by the Commissioner of Customs (Prev.), Mumbai, India in August 2003. The Show Cause Notice concerns alleged violations of Indian Customs laws and regulations regarding one of our jackup drilling rigs. The Commissioner alleges certain violations to have occurred before, at the time of, and after NACL acquired the rig from the rig’s previous owner. We maintain that NACL has acted in accordance with all Indian Customs laws and regulations and believe the Show Cause Notice is without merit as against NACL. In the purchase agreement for the rig, NACL received contractual indemnification against liability for Indian customs duty from the rig’s previous owner. In connection with the export of the rig from India in 2001, NACL posted a bank guarantee in the amount of $3,300,000 and a customs bond in the amount of $21,340,000, both of which remain in place. NACL filed its initial replies to the Show Cause Notice in December 2003. NACL appeared through counsel before the Commissioner in September 2004 and made oral arguments and written submissions. The Commissioner has not ruled to date. We do not believe the resolution of this matter will have a material adverse effect on our financial position, results of operations or cash flows.
We are a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to our financial position, results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 1, 2005 with respect to our executive officers:
James C. Day has served as Chairman of the Board of Noble since October 22, 1992 and as Chief Executive Officer since January 1, 1984. He served as President of Noble Drilling from January 1, 1984 to January 1, 1999 before reassuming the office of President of Noble effective March 1, 2005. From January 1983 until his election as President and Chief Executive Officer, Mr. Day served as Vice President of Noble Drilling. Prior to 1983, Mr. Day served as Vice President and Assistant Secretary of Noble Affiliates, Inc. He has been a director of Noble since 1984. Mr. Day is also a director of two public companies, Global Industries, Ltd. and ONEOK, Inc., and a trustee of The Samuel Roberts Noble Foundation, Inc., a not-for-profit corporation.
Mark A. Jackson has served as Senior Vice President, Chief Financial Officer, Treasurer and Controller of Noble since September 1, 2000. Mr. Jackson was named Chief Operating Officer effective March 1, 2005. From May 1999 to August 2000, Mr. Jackson served as Executive Vice President and Chief Financial Officer for Santa Fe Snyder Corporation, an oil and gas exploration and production company. From August 1997 to May 1999, he served as Senior Vice President and Chief Financial Officer of Snyder Oil Corporation, an oil and gas exploration and production company. Prior to August 1997, Mr. Jackson served consecutively in the positions of Vice President & Controller, Vice President - Finance and Vice President & Chief Financial Officer of Apache Corporation, an oil and gas exploration and production company, beginning in 1988.
Danny W. Adkins has served as Senior Vice President - Operations of Noble Drilling since November 1, 2003. Prior to that, he held the same position with Noble Drilling International (Cayman) Ltd. since August 2000. From March 1997 to August 2000, Mr. Adkins served consecutively as Vice President - Engineering and Senior Vice President - Engineering for Noble Drilling Services Inc. From September 1994 to March 1997, he served as Vice President - Operations for Noble Drilling Services Inc. Prior to September 1994, Mr. Adkins served consecutively in the positions of Manager of Engineering and Vice President - Operations for a predecessor subsidiary of Noble, beginning in December 1990.
Julie J. Robertson has served as Senior Vice President - Administration of Noble since July 2001 and as Corporate Secretary of Noble since December 1993. Ms. Robertson served as Vice President - Administration of Noble Drilling from April 1996 to July 2001. In September 1994, Ms. Robertson became Vice President - Administration of Noble Drilling Services Inc. From January 1989 to September 1994, Ms. Robertson served consecutively as Manager of Benefits and Director of Human Resources for Noble Drilling Services Inc. Prior to 1989, Ms. Robertson served consecutively in the positions of Risk and Benefits Manager and Marketing Services Coordinator for a predecessor subsidiary of Noble, beginning in 1979.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Noble’s ordinary shares are listed and traded on the New York Stock Exchange under the symbol “NE”. The following table sets forth for the periods indicated the high and low sales prices of our ordinary shares:
As previously reported on Form 8-K, in October 2004, Noble’s board of directors took action to modify our then existing dividend policy and institute a new policy in the first quarter of 2005 for the payment of a quarterly cash dividend. On February 4, 2005, Noble’s board of directors declared a quarterly cash dividend of $0.02 per ordinary share. This dividend was paid on March 1, 2005 to members (shareholders) of record on February 16, 2005. Prior thereto, the Company had not paid cash dividends on its equity securities since becoming a publicly held corporation in October 1985. The declaration and payment of dividends in the future are at the discretion of Noble’s board of directors and the amount thereof will depend on the Company’s results of operations, financial condition, cash requirements, future business prospects, contractual restrictions and other factors deemed relevant by Noble’s board of directors.
At March 3, 2005, there were 1,467 record holders of ordinary shares.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
(1)
Consists of Cash and cash equivalents and Investments in marketable securities as reported on our consolidated balance sheets.
(2)
Consists of long-term debt and current maturities of long-term debt.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is intended to assist you in understanding our financial position as of December 31, 2004 and 2003, and our results of operations for each of the three years in the period ended December 31, 2004. You should read the accompanying consolidated financial statements and their notes in conjunction with this discussion.
EXECUTIVE OVERVIEW
Demand for drilling services depends on a variety of economic and political factors, including worldwide demand for oil and gas, the ability of OPEC to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of the various governments regarding exploration and development of their oil and gas reserves.
Our results of operations depend on the levels of activity in offshore oil and gas exploration, development and production in markets worldwide. Historically, oil and gas prices and market expectations of potential changes in these prices have significantly affected that level of activity. Generally speaking, higher oil and natural gas prices or our customers’ expectations of higher prices result in a greater demand for our services. These prices are extremely volatile. Despite favorable oil prices in 2004, drilling activity in certain international markets, which are influenced more by oil prices than natural gas prices, was generally weaker in 2004 as compared to 2003 and 2002. We believe that operators in these international markets have been reluctant to increase drilling activity due to the uncertainty surrounding the worldwide economy, the political unrest in the Middle East (including the military action in Iraq), Nigeria and Venezuela, and difficulties in obtaining funding from government-affiliated oil companies. However, drilling activity in the North Sea and West Africa began to improve in the latter part of 2004, while remaining strong in other international markets in which we operate, including the Middle East, Mexico and Brazil.
Natural gas prices during 2004 averaged $6.13 per thousand cubic feet (source: average Henry Hub closing bidweek price). Although natural gas prices in 2004 were 12 percent higher than 2003, and significantly higher than historical prices, operators generally did not significantly increase drilling activities in the U.S. Gulf of Mexico in water depths applicable to jackups and submersibles until the second half of 2004 due principally to a lack of economically viable drilling prospects and uncertainty surrounding the worldwide economy. Drilling activity levels in water depths applicable to semisubmersibles also began to improve during the second half of 2004.
We cannot predict the future level of demand for our drilling services or future conditions in the offshore contract drilling industry. Decreases in the level of demand for our drilling services have an adverse effect on our results of operations.
In recent years, we have focused on increasing the number of rigs in our fleet capable of ultra-deepwater offshore drilling. We have incorporated this focus into our broader, long-standing business strategy to actively expand our international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications and to deploy assets in important geological areas. We have also increased the number of jackups in key international markets. Since the beginning of 2000, we have mobilized nine jackup rigs and one semisubmersible from the U.S. Gulf of Mexico to international markets. We have also added nine jackups to our international fleet through rig acquisitions during this same period. In addition, we have added two deepwater semisubmersibles to our fleet and have acquired two additional semisubmersible baredeck hulls since the beginning of 2000.
RESULTS OF OPERATIONS
2004 Compared to 2003
General
Net income for 2004 was $146,086,000, or $1.09 per diluted share, on operating revenues of $1,066,231,000, compared to net income of $166,416,000, or $1.25 per diluted share, on operating revenues of $987,380,000 for 2003.
The following table sets forth operating revenues and operating costs and expenses for each of our reportable segments (for additional information regarding our reportable segments, see Note 16 of our accompanying consolidated financial statements) for the periods indicated:
Rig Utilization, Operating Days and Average Dayrates
The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for 2004 and 2003:
(1)
Information reflects our policy of reporting on the basis of the number of actively marketed rigs in our fleet. Percentages reflect the results of rigs only during the period in which they are owned or operated by us.
(2)
Information reflects the number of days that our rigs were operating under contractual terms.
(3)
“International” encompasses contract drilling services conducted in the Middle East, Mexico, the North Sea, Brazil, West Africa, India and the Mediterranean Sea.
(4)
These units have water depth ratings of 6,000 feet or greater depending on the unit.
(5)
These units have water depth ratings less than 6,000 feet.
(6)
“Domestic” encompasses contract drilling services conducted in the U.S. Gulf of Mexico.
International Contract Drilling Services
The following table sets forth the operating revenues and the operating costs and expenses for our international contract drilling services segment for 2004 and 2003:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as direct operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. International contract drilling services revenues increased $50,909,000 as additional operating days in our Middle East, Mexico and West Africa divisions were partially offset by weaker market conditions in the North Sea, and a shipyard project on the Noble Roger Eason drillship in Brazil. We had 1,392 additional operating days in our Middle East division due primarily to the acquisition of the Noble Gene House, Noble Charlie Yester and Noble Cees van Diemen premium jackups in July 2003, September 2003, and July 2004, respectively, the mobilization of the Noble Carl Norberg premium jackup to the Mediterranean Sea from the U.S. Gulf of Mexico in December 2003, and additional operating days on the Noble Dick Favor. The additional operating days in our Middle East division resulted in additional revenues of approximately $68,000,000. In Mexico, we experienced an additional 373 operating days due to the mobilization of three premium jackups from the U.S. Gulf of Mexico since the beginning of 2003 for long-term contracts with Pemex, which resulted in additional international contract drilling services revenues of approximately $19,000,000. An increase in activity in West Africa over the latter part of 2004 resulted in an additional 256 operating days on our jackups in the region as compared to 2003. In addition, we transferred the Noble Homer Ferrington semisubmersible to our West Africa division in July 2004 from the U.S. Gulf of Mexico for a two-year contract that commenced in November 2004. The additional operating days in West Africa resulted in additional revenues of approximately $13,000,000. The generally weaker market conditions in the North Sea resulted in lower utilization and average dayrates in 2004 for this region. Utilization in the North Sea during 2004 decreased to 91 percent from 97 percent in 2003, while our average dayrate decreased 10 percent to $52,090. The weaker market conditions in the North Sea and the shipyard project on the Noble Roger Eason decreased revenues by approximately $28,000,000 and $21,000,000, respectively. The increase in engineering, consulting and other revenue of $1,696,000 was attributable primarily to an equipment inspection fee earned on a per day basis by the Noble Homer Ferrington as part of the rig’s preparations for its long-term contract in Nigeria.
Since September 2002, we have mobilized a total of seven jackups from the U.S. Gulf of Mexico to Mexico for long-term contracts with Petroleos Mexicanos (“Pemex”), including three since the beginning of 2003. The mobilization of these jackup rigs was pursuant to our long-standing business strategy of deploying our assets in important geological regions. We believe the long-term financial returns for our jackup rigs will be higher in international regions due to relatively fewer quality drilling prospects in the U.S. Gulf of Mexico at water depths applicable to these units. As a result, we made the strategic decision to mobilize these units to Mexico for long-term contracts. Following the completion of its contract in early January 2005, we mobilized the Noble Lewis Dugger from Mexico to the U.S. Gulf of Mexico for upgrades and refurbishments. Following this shipyard work, we plan to mobilize the rig back to Mexico if successful on a recent bid to Pemex for a one-year contract that is expected to commence in May 2005.
Nigeria traditionally has had the largest concentration of drilling rigs in West Africa. Demand in Nigeria began to decline in the latter part of 2002 due to political unrest attributable to elections and strikes. Although this unrest declined towards the end of 2003, demand did not improve as our customers were in the process of obtaining approval for projects from the government-affiliated oil companies. Due to geology which is favorable for offshore exploration and production, we believe the prospects for drilling activity in West Africa are good and that our operations in the region will provide financial returns over time which are comparable to other key international regions, and as a result, we have kept our six jackups in this market. Utilization on our six jackups in West Africa improved during 2004, especially over the second half of the year. By the middle of the fourth quarter of 2004, all six of our jackups were under contract, with five contracted through 2005. In November 2004, the Noble Homer Ferrington semisubmersible commenced a two-year contract with ExxonMobil in Nigeria. This unit previously operated in the U.S. Gulf of Mexico. We believe that the long-term contracts initiated during 2004 for our jackups and the Noble Homer Ferrington semisubmersible support our favorable outlook for this region.
We believe that the weaker market conditions in the North Sea during 2004 were attributable to the gradual maturing of the North Sea basin. We also believe that improvement in dayrates in this region will be driven by the independent operators, who historically have been more aggressive than major oil and gas companies in developing smaller reserve targets. Market conditions in the North Sea improved during the second half of 2004, as the supply and demand of rigs in the region came closer into balance. All of our units in the region are currently operating and dayrates have continued to strengthen on recent contracts. In Brazil, the Noble Roger Eason drillship was in the shipyard for all of 2004. We performed regulatory maintenance and upgrades to the unit, including water depth increase to 7,200 feet, which we recently completed. The unit has a 700-day contract with Petrobras at a dayrate of $96,250, plus the opportunity for a performance bonus, which we anticipate will commence in March 2005.
Operating Costs and Expenses. International contract drilling services expenses increased $56,866,000 due to the additional operating days in our Middle East, Mexico and West Africa divisions following the acquisition of five international jackups since July 2003, the mobilization of four premium jackups out of the U.S. Gulf of Mexico to international locations since the beginning of 2003, and the transfer of the Noble Homer Ferrington semisubmersible to our West Africa division in July 2004 for a contract that commenced in November 2004. In addition, we performed maintenance projects on our three drillships in Brazil, including the Noble Roger Eason upgrade project that we recently completed, and we experienced higher labor costs in all our international regions. Approximately two-thirds of the increase in our international contract drilling services expenses was attributable to the additional operating days. Engineering, consulting and other expenses in our international contract drilling services segment decreased $1,636,000 due to a lower minority interest amount related to our Noble Muravlenko drillship. The Noble Muravlenko, in which we own an 82 percent interest, incurred additional downtime in 2004, as well as the rig’s drydocking in late July 2004, resulting in a reduced minority interest amount. Depreciation expense increased $22,024,000 due to the rig acquisitions, mobilization of jackup rigs to international locations, and transfer of the Noble Homer Ferrington to our West Africa division discussed above. See the discussion below under “Other Items” regarding selling, general and administrative expenses.
Domestic Contract Drilling Services
The following table sets forth the operating revenues and the operating costs and expenses for our domestic contract drilling services segment for 2004 and 2003:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as direct operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Domestic contract drilling services revenues decreased $3,098,000 due to a lower average dayrate on our semisubmersibles and fewer operating days on our jackups following the mobilization of four premium jackups out of the U.S. Gulf of Mexico to international locations since the beginning of 2003. These items were mostly offset by a higher average dayrate on our jackups, higher utilization and average dayrates on our submersibles, and additional operating days on our semisubmersibles. Market conditions for jackups and submersibles in the U.S. Gulf of Mexico improved during 2004 as the supply of such rigs has come closer into balance with demand following the industry’s mobilization of jackup rigs out of this region for international opportunities and a moderate increase in demand. Utilization of our submersibles increased to 94 percent from 77 percent in 2003, while the average dayrate on these units increased 28 percent to $25,840. Our submersibles contributed additional revenues of $14,000,000 in 2004. Likewise, the average dayrate on our jackup rigs increased 51 percent, although the impact on our domestic contract drilling services revenues was mostly offset by 431 fewer operating days due to the mobilization of the three premium jackups to Mexico for long-term contracts with Pemex and the mobilization of another premium jackup to the Mediterranean Sea during 2003. The Noble Homer Ferrington was transferred to our West Africa division in July 2004 and began preparations for a two-year contract in Nigeria. The average dayrate on our semisubmersibles with water depth ratings of 6,000 feet or greater decreased 15 percent, which reduced revenues by approximately $28,000,000, due to certain units operating on the spot-rate market with lower average dayrates than those earned while under previous long-term contracts. However, additional operating days on our semisubmersibles, primarily the Noble Lorris Bouzigard and Noble Therald Martin, resulted in additional revenues of approximately $13,000,000. The decrease in engineering, consulting and other revenues of $7,680,000 was attributable to the sale of our interest in certain deepwater oil and gas properties during the fourth quarter of 2003.
The demand for semisubmersibles in the U.S. Gulf of Mexico began to improve during the latter part of 2004, with significant dayrate increases and longer terms on contracts for these units as compared to earlier in the year. This improvement has been the result of increased demand for deepwater semisubmersibles due to operators’ increased exploration spending and upcoming development projects in the region. The supply of these units is currently short of projected demand for the next two to three years as operators look to obtain the rig capacity necessary to meet their long-term exploration and development plans. In December 2004, we received a commitment from Shell Exploration & Production Company for a two-year contract on the Noble Clyde Boudreaux, an ultra-deepwater semisubmersible that upon completion of its upgrade will be capable of drilling in water depths of 10,000 feet. This upgrade is expected to be completed and the unit to commence operations in the third quarter of 2006. In addition to the Noble Clyde Boudreaux, we have three ultra-deepwater hulls in inventory, ready for upgrade. Notwithstanding the recent improvement in both the deepwater and shallow water markets in the U.S.
Gulf of Mexico, the mobilization of the Noble Homer Ferrington semisubmersible and four premium jackups from the U.S. Gulf of Mexico to international locations was pursuant to our long-standing business strategy of deploying our assets in important geological regions as described earlier.
Operating Costs and Expenses. Domestic contract drilling services expenses increased $604,000 due to a $9,000,000 pre-tax charge related to costs incurred in 2004 to repair damage to three of our semisubmersibles in the U.S. Gulf of Mexico as a result of Hurricane Ivan. Excluding this charge, domestic contract drilling services expenses decreased $8,396,000 due to the mobilization of four jackup rigs from the U.S. Gulf of Mexico to international locations and the transfer of the Noble Homer Ferrington semisubmersible to our West Africa division, partially offset by increased costs attributable to the activation of the Noble Lorris Bouzigard and Noble Therald Martin semisubmersibles, which were placed into service in March 2003 and November 2003, respectively. The mobilization of the four jackup rigs and transfer of the Noble Homer Ferrington semisubmersible to international locations reduced domestic contract drilling expenses by approximately $16,000,000, whereas the activation of the Noble Lorris Bouzigard and Noble Therald Martin increased contract drilling expenses by approximately $8,000,000. The lower engineering, consulting and other expenses of $2,392,000 were due to the sale of our interests in certain deepwater oil and gas properties during the fourth quarter of 2003. Depreciation expense decreased $1,907,000 due to the mobilization of four premium jackups out of the U.S. Gulf of Mexico and transfer of the Noble Homer Ferrington to our West Africa division, which reduced depreciation expense by approximately $7,000,000, partially offset by additional depreciation of approximately $5,000,000 attributable to the activation of the Noble Lorris Bouzigard and Noble Therald Martin semisubmersibles. See the discussion below under “Other Items” regarding selling, general and administrative expenses.
Engineering & Consulting Services
The following table sets forth the operating revenues and the operating costs and expenses for our engineering and consulting services segment for 2004 and 2003:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Excluding reimbursables, operating revenues for our engineering and consulting services segment increased $4,277,000 due principally to the sale of a license of our OptiDrillTM drilling efficiency technology during 2004 for $3,000,000 and additional project management engagements.
Operating Costs and Expenses. Excluding reimbursables, operating costs and expenses for our engineering and consulting services segment decreased $1,379,000 due to fewer joint industry research projects conducted in 2004 by our Noble Technology Services Division, mostly offset by additional project management engagements in 2004.
Other
The following table sets forth the operating revenues and the operating costs and expenses for our other services for 2004 and 2003:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Revenues from our labor contract drilling services increased $22,835,000 due to additional operating days in the North Sea, mostly attributable to the start of a new labor contract for Apache North Sea Limited under which we commenced operations on three platforms in the Forties Field during 2004. The additional operating days in the North Sea represented approximately 90 percent of the increase in our labor contract drilling services revenues in 2004. Foreign exchange fluctuations related to our operations in Canada on the Hibernia project also resulted in higher revenues. We are paid for this work in Canadian dollars, and the Canadian dollar was stronger relative to the U.S. dollar in 2004 than in 2003. In addition, contractual provisions covering the Hibernia project allowed for increases in the labor, maintenance and administrative portions of the dayrate on the project during 2004. Engineering, consulting and other revenues increased $3,892,000 due to increased activity on an engineering services engagement in the North Sea.
Operating Costs and Expenses. Excluding reimbursables, operating costs and expenses for our other services increased $25,003,000 due to the additional labor contract operating days in the North Sea, the stronger Canadian dollar, higher labor, maintenance and administrative costs related to our Hibernia project in Canada, and the increased activity on an engineering services engagement in the North Sea. The additional operating days on our North Sea labor contracts and increased activity on the engineering services engagement represented approximately 75 percent and 15 percent, respectively, of the increase in our other services operating costs and expenses.
Other Items
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses increased $7,080,000 due to additional professional fees associated with compliance under the requirements of the Sarbanes-Oxley Act of 2002, additional stock-based compensation expense, higher insurance premiums for corporate-related policies and additional pension expense. The additional professional fees related to the Sarbanes-Oxley Act of 2002 was the largest individual factor in our higher SG&A expenses in 2004, representing nearly 30 percent of the increase.
Gain on Sale of Property and Equipment. In 2003, we sold our interest in a deepwater oil and gas property in the U.S. Gulf of Mexico to ENI Petroleum for $5,200,000 in cash. We realized a gain of $3,472,000 upon the sale of our interest in this property. No sales of oil and gas properties were made in 2004.
Interest Expense. Interest expense decreased $5,902,000 due to the continued retirement of debt since the beginning of 2003. Since January 1, 2003, we have made repayments of long-term debt totaling $158,513,000, including $77,933,000 in 2004.
Other, net. Other, net increased $2,897,000 due to additional equity in income from our 50 percent equity interest in Noble Crosco Drilling Ltd., a joint venture which owns the Panon jackup rig, and additional interest income earned on our cash and investments in marketable debt securities due to higher interest rates in 2004 than in 2003. The Panon was in the shipyard for two months in 2003, whereas the rig operated the full year in 2004.
Income Tax Provision. Income tax provision decreased $4,837,000 due to lower pretax earnings and the favorable resolution of income tax audits in 2004, which resulted in a lower effective tax rate in 2004 than in 2003. Excluding the impact of the favorable resolution of income tax audits, the effective tax rate was 15 percent in 2004 compared to 11 percent in 2003. This higher effective tax rate was a result of additional earnings during 2004 from rigs owned by U.S. subsidiaries which were operating in Mexico, India and the Mediterranean Sea and reduced earnings from our Brazil and North Sea divisions, which have lower effective tax rates.
2003 Compared to 2002
General
Net income for 2003 was $166,416,000, or $1.25 per diluted share, on operating revenues of $987,380,000, compared to net income of $209,503,000, or $1.57 per diluted share, on operating revenues of $990,248,000 for 2002.
The following table sets forth operating revenues and operating costs and expenses for each of our reportable segments (for additional information regarding our reportable segments, see Note 16 of our accompanying consolidated financial statements) for the periods indicated:
Rig Utilization, Operating Days and Average Dayrates
The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for 2003 and 2002:
(1)
Information reflects our policy of reporting on the basis of the number of actively marketed rigs in our fleet. Percentages reflect the results of rigs only during the period in which they are owned or operated by us.
(2)
Information reflects the number of days that our rigs were operating under contractual terms.
(3)
“International” encompasses contract drilling services conducted in the Middle East, Mexico, the North Sea, Brazil, West Africa, India and the Mediterranean Sea.
(4)
These units have water depth ratings of 6,000 feet or greater depending on the unit.
(5)
These units have water depth ratings less than 6,000 feet.
(6)
“Domestic” encompasses contract drilling services conducted in the U.S. Gulf of Mexico.
International Contract Drilling Services
The following table sets forth the operating revenues and the operating costs and expenses for our international contract drilling services segment for 2003 and 2002:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as direct operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. International contract drilling services revenues increased $26,660,000 due to additional operating days for our jackup rigs in Mexico and the Middle East, and a higher average dayrate in Brazil, partially offset by lower utilization rates on jackup rigs in West Africa and lower average dayrates in the North Sea. The additional operating days in Mexico, which resulted in additional international contract drilling services revenues of approximately $94,000,000, were attributable to the mobilization of seven rigs to Mexico from the U.S. Gulf of Mexico beginning in September 2002. The increase in operating days in the Middle East provided additional revenue of approximately $19,000,000 and was attributable primarily to the operations of the Noble Roy Rhodes and Dhabi II jackups, which we purchased in December 2002. The average dayrates on our Noble Paul Wolff semisubmersible and three drillships in Brazil increased from 2002 due to the receipt of performance bonuses for reducing operational downtime, which resulted in higher revenues in this region of approximately $15,000,000. The lower utilization in West Africa and lower average dayrates in the North Sea impacted revenues by approximately $55,000,000 and $46,000,000, respectively. Engineering, consulting and other revenues decreased $472,000 due to a special safety incentive bonus earned in West Africa during 2002.
Operating Costs and Expenses. International contract drilling services expenses increased $54,199,000 due to the additional operating days in Mexico and the Middle East, and labor increases in all regions. In addition, these expenses increased due to stacked costs on two jackups we acquired in the Middle East during 2003, and the costs to mobilize one jackup rig to the Middle East from Brazil and one jackup rig to the Mediterranean Sea from the U.S. Gulf of Mexico. These increases were partially offset by lower insurance costs. Of these factors, the additional operating days in Mexico had the largest impact on our international contract drilling expenses, representing an increase of approximately $38,000,000. We did not reduce our operating expenses in West Africa significantly during 2003 even though we experienced fewer operating days there, because we maintained a standard crew size on stacked units in order to perform repairs, maintenance, and asset preservation work. Depreciation expense increased $26,781,000 due to the mobilization of seven rigs to Mexico from the U.S. Gulf of Mexico beginning in September 2002, the acquisition of the Dhabi II and Noble Roy Rhodes jackup rigs in December 2002 and the acquisition of the Noble Gene House and Noble Charlie Yester jackups in July 2003 and September 2003, respectively. See the discussion below under “Other Items” regarding selling, general and administrative expenses.
Domestic Contract Drilling Services
The following table sets forth the operating revenues and direct operating expenses for our domestic contract drilling services segment for 2003 and 2002:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as direct operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Domestic contract drilling services revenues decreased $47,476,000 due to fewer operating days on our domestic jackup rigs following the mobilization of seven rigs from the U.S. Gulf of Mexico to Mexico beginning in September 2002. The fewer operating days on our domestic jackups resulted in a reduction in our domestic contracting drilling services revenues of approximately $47,000,000. The mobilization of these jackup rigs was pursuant to our long-standing business strategy of deploying our assets in important geological regions as described earlier. Operating days on the Noble Lorris Bouzigard, which was activated in March 2003, and higher utilization on our submersibles were offset by lower utilization on our deepwater semisubmersibles. Engineering, consulting and other revenues increased $5,308,000 due to additional revenue from interests in deepwater oil and gas properties, which began producing during the latter part of 2002, and revenue earned by the Noble Homer Ferrington semisubmersible while the unit was not operating, pursuant to its long-term contract.
Operating Costs and Expenses. Domestic contract drilling services expenses decreased $37,790,000 due to the fewer operating days on our domestic jackup rigs, while lower insurance costs, due to no hull and machinery claims incurred during 2003, offset additional operating expenses attributable to the activation of the Noble Lorris Bouzigard and Noble Therald Martin semisubmersibles. Engineering, consulting and other expenses increased $1,782,000 due to additional operating expenses related to our interests in deepwater oil and gas properties. Depreciation expense decreased $4,301,000 due to the mobilization of seven rigs from the U.S. Gulf of Mexico to Mexico beginning in September 2002, partially offset by the activation of the Noble Lorris Bouzigard and Noble Therald Martin semisubmersibles in March 2003 and November 2003, respectively, following each unit’s upgrade. The mobilization of jackup rigs out of the U.S. Gulf of Mexico reduced domestic depreciation expense by approximately $8,000,000, whereas the activation of the two semisubmersibles increased depreciation expense by approximately $4,000,000. See the discussion below under “Other Items” regarding selling, general and administrative expenses.
Engineering & Consulting Services
The following table sets forth the operating revenues and the operating costs and expenses for our engineering and consulting services segment for 2003 and 2002:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Excluding reimbursables, operating revenues for our engineering and consulting services segment decreased $4,911,000 due to fewer joint industry research projects undertaken by our Noble Drilling Technology Division, partially offset by additional project management engagements.
Operating Costs and Expenses. Excluding reimbursables, operating costs and expenses for our engineering and consulting services segment increased $1,262,000 due to additional costs related to the testing and development of our Well DirectorTM automatic rotary steerable drilling system, additional project management engagements and higher depreciation and administrative expenses. These increases were partially offset by fewer joint industry research projects undertaken and reduced costs on certain drilling optimization software projects.
Other
The following table sets forth the operating revenues and the operating costs and expenses for our other services for 2003 and 2002:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
Operating Revenues. Labor contract drilling services revenues increased $2,076,000 as a result of foreign exchange fluctuation due in large part to our operations in Canada on the Hibernia project. We are paid for that
work in Canadian dollars, and the Canadian dollar was stronger in 2003 as compared to the U.S. dollar. In addition, contractual provisions covering the Hibernia project allowed for increases in the labor, maintenance and administrative portions of the dayrate on the Hibernia project during 2003. These increases were partially offset by lower utilization on two of our North Sea labor contracts. The lower engineering, consulting and other revenues of $2,084,000 were attributable to reduced activity on an engineering services engagement in the North Sea.
Operating Costs and Expenses. Excluding reimbursables, operating costs and expenses for other services decreased $155,000 as higher labor contract drilling services expenses were mostly offset by lower engineering, consulting and other expenses. The higher labor contract drilling services expenses of $1,691,000 were due to the stronger Canadian dollar and higher labor, maintenance and administrative costs related to our Hibernia project in Canada, partially offset by lower utilization on two of our North Sea labor contracts. The lower engineering, consulting and other expenses of $2,042,000 were attributable to reduced activity on an engineering services engagement in the North Sea.
Other Items
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $305,000 due to nonrecurring professional fees and filing fees of approximately $3,500,000 incurred during the first half of 2002 related to our corporate restructuring. This decrease was mostly offset by unrealized gains in 2002 on the assets in the Rabbi Trust for the Noble Drilling Corporation 401(k) Savings Restoration Plan, which increased the related liability for the plan in 2003, and higher pension expense in 2003 due to a lower discount rate and assumed long-term rate of return on plan assets for 2003.
Gain on Sale of Property and Equipment. Gain on sale of property and equipment decreased by $2,436,000 due to a gain in 2002 of $5,908,000 on the sale of our interest in one of our deepwater oil and gas properties to Pioneer Natural Resources USA, Inc. for $6,200,000 in cash and the assumption of liabilities related to our share of drilling and development costs on this property. In 2003, we sold our interest in another deepwater oil and gas property to ENI Petroleum for $5,200,000 in cash. We realized a gain of $3,472,000 upon the sale of our interest in this property.
Interest Expense. Interest expense decreased $2,331,000 due to the continued retirement of higher interest rate debt in 2003. We made payments of long-term debt totaling $80,580,000 in 2003.
Other, net. Other, net increased $3,747,000 as 2002 included a realized loss of $9,758,000 on an investment in marketable equity securities resulting from a decline in value considered by management to be other than temporary. The 2002 loss was partially offset by additional interest income earned on our cash and marketable securities and equity in income of joint ventures in 2002 as compared to 2003. In 2003, interest income on our cash and marketable securities decreased $2,007,000 due to a lower average balance of these investments and a 30 percent decrease in their average yield.
Income Tax Provision. Income tax provision decreased $13,254,000 due to lower pre-tax earnings and a lower effective tax rate. The effective tax rate was 11 percent in 2003 compared to 14 percent in 2002. The lower effective tax rate in 2003 was a result of our corporate restructuring in April 2002 and a higher percentage of our pretax earnings being derived from our international operations, which generally have lower effective tax rates than our domestic operations.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal capital resource in 2004 was net cash provided by operating activities of $332,221,000, which compared to $365,308,000 and $445,364,000 in 2003 and 2002, respectively. At December 31, 2004, we had cash and cash equivalents of $58,790,000, marketable debt securities totaling $132,788,000, and approximately $184,279,000 of funds available under our bank credit facility. We had working capital, including cash, of $211,117,000 and $177,936,000 at December 31, 2004 and 2003, respectively. Total debt as a percentage of total debt plus shareholders’ equity was 18 percent at December 31, 2004 and 21 percent at December 31, 2003.
During 2004, we repurchased 1,087,000 of our ordinary shares at an average price of $36.54 per ordinary share for a total cost of $39,714,000. We did not repurchase any of our ordinary shares during 2003. During 2002, we repurchased 1,055,000 of our ordinary shares at an average price of $32.20 per ordinary share for a total cost of $33,966,000. Additional repurchases, if any, may be made on the open market or in private transactions at prices determined by us.
We did not sell any put options covering our ordinary shares during 2004 or 2003. During 2002, we sold put options covering an aggregate of 1,300,000 of our ordinary shares in private transactions at an average price paid to us of $2.81 per option. Of the 1,300,000 options sold during 2002, 300,000 expired unexercised and 400,000 were exercised during 2002, which resulted in 600,000 options outstanding at December 31, 2002. All of these options expired unexercised in the first quarter of 2003. At December 31, 2004 and 2003, we had no purchase requirements with regard to any put options previously sold by us.
These share repurchases and sales of put options were effected pursuant to the share repurchase program which our board of directors authorized and adopted and which we announced on January 31, 2002. The program authorization covers an aggregate of 15,000,000 ordinary shares. As of March 3, 2005, 9,162,000 shares remained available under this authorization.
In 2004, we made total fundings of $1,389,000 to our domestic and international pension plans. We made total fundings of $22,155,000 to our domestic and international pension plans in 2003, including a discretionary funding of $17,100,000. This discretionary funding did not have a material impact on our 2003 selling, general and administrative expenses, but it reduced our unfunded pension liability. During 2002, we made fundings totaling $5,327,000 to our pension plans. We expect fundings in 2005 to approximate $1,500,000.
Capital Expenditures
Capital expenditures totaled $261,041,000 and $307,134,000 for 2004 and 2003, respectively. Capital expenditures for 2004 included the acquisition of the Noble Mark Burns (formerly Okhi), a Levingston 111-S designed independent leg jackup unit, for $29,500,000, and the exercise prices of options to purchase the Noble Cees van Diemen (formerly Maersk Viking) and the Noble David Tinsley (formerly Maersk Valiant) premium jackup rigs for $32,900,000 and $28,400,000, respectively. Capital expenditures during 2003 included capital upgrades to certain semisubmersibles of $108,100,000, the exercise prices of options to purchase the Noble Gene House (formerly Trident 19) and Noble Charlie Yester (formerly Trident 18) jackup rigs for $25,200,000 and $32,900,000, respectively, and the acquisition of options for $28,200,000 to purchase the Noble Cees van Diemen and Noble David Tinsley. In addition, deferred repair and maintenance expenditures totaled $72,948,000 and $36,984,000 for 2004 and 2003, respectively. We expect that our capital expenditures and deferred repair and maintenance expenditures for 2005 will aggregate approximately $300,000,000 and $85,000,000, respectively, which includes approximately $100,000,000 for 2005 for the upgrade of the Noble Clyde Boudreaux semisubmersible in preparation for its commitment for a long-term contract with Shell Exploration & Production Company estimated to begin in the third quarter of 2006. We estimate our capital expenditures for 2006 to complete the upgrade of the Noble Clyde Boudreaux to approximate $50,000,000. We had no joint venture fundings in 2004 and anticipate none in 2005. For more information on acquisitions, see Note 3 of our accompanying consolidated financial statements. For information on deferred repair and maintenance expenditures and joint venture fundings, see Notes 1 and 6 of our accompanying consolidated financial statements.
The Noble Mark Burns was recently mobilized from China to the Middle East, where additional upgrade work will include leg extension to 300 feet water depth capability, a 65 foot cantilever, a third mud pump, and quarters expansion for 160 personnel. We estimate the costs of this upgrade will approximate $30,000,000.
In connection with several projects, we have entered into agreements with various vendors to purchase or construct property and equipment that generally have long lead times for delivery. Any equipment purchased for a project on which we do not proceed would be used, where applicable, as capital spares for other units in our fleet. As of December 31, 2004, we had approximately $32,000,000 of outstanding purchase commitments related to these projects, which are included in the projected 2005 capital expenditure and deferred repair and maintenance amounts above.
Certain projects currently under consideration could require, if they materialize, capital expenditures or other cash requirements not included in the 2005 budget. In addition, we will continue to evaluate acquisitions of drilling units from time to time. Factors that could cause actual project capital expenditures to materially exceed the planned capital expenditures include delays and cost overruns in shipyards, shortages of equipment, latent damage or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, and changes in design criteria or specifications during repair or construction.
Credit Facilities and Long-Term Debt
Noble Drilling has in place a $300,000,000 bank credit agreement (the “Credit Agreement”), which extends through November 30, 2009. In November 2004, we amended the Credit Agreement to increase the total commitment to $300,000,000 from $200,000,000 and extend the maturity date to November 30, 2009 from May 30, 2006. In connection with our corporate restructuring in 2002, Noble Corporation (“Noble”) and its wholly-owned subsidiary, Noble Holding (U.S.) Corporation, have unconditionally guaranteed the performance of Noble Drilling under the Credit Agreement. As of December 31, 2004, we had outstanding borrowings and outstanding letters of credit of $100,000,000 and $15,721,000, respectively, under the Credit Agreement, with $184,279,000 remaining available thereunder. Additionally, as of December 31, 2004, we had other letters of credit and third-party guarantees of $35,916,000 and performance and customs bonds totaling $46,949,000 supported by surety bonds.
At December 31, 2004, our debt had decreased to $511,649,000, including current maturities of $8,361,000, due to debt repayments during 2004 of $77,933,000, including the repayment of $25,000,000 of borrowings on our credit facility. At December 31, 2004 and 2003, we had no off-balance sheet debt. For additional information on long-term debt, see Note 7 to our accompanying consolidated financial statements.
We believe that our cash and cash equivalents, marketable securities, net cash provided by operating activities, available borrowings under lines of credit, and access to other financing sources will be adequate to meet our anticipated short-term and long-term liquidity requirements, including capital expenditures and scheduled debt repayments.
Summary of Contractual Cash Obligations and Commitments
The following table summarizes our contractual cash obligations and commitments at December 31, 2004 (dollar amounts are in thousands):
CORPORATE RESTRUCTURING
On April 30, 2002, Noble became the successor to Noble Drilling as part of the internal corporate restructuring of Noble Drilling and its subsidiaries approved by stockholders of Noble Drilling. The restructuring was accomplished through the merger of an indirect, wholly-owned subsidiary of Noble Drilling into Noble Drilling. Noble Drilling was the surviving entity in the merger and is now an indirect, wholly-owned subsidiary of Noble. In addition, as a result of the merger, all of the outstanding shares of common stock (and the related preferred stock purchase rights) of Noble Drilling were exchanged for ordinary shares (and related preferred share purchase rights) of Noble. We accounted for the restructuring as a reorganization of entities under common control. Consequently, the consolidated amounts of assets, liabilities and shareholders’ equity did not change as a result of the restructuring.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Critical accounting policies and estimates that most significantly impact our consolidated financial statements are those related to our property and equipment, impairment of long-lived assets, insurance reserves, revenue recognition and income taxes.
Property and Equipment
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation, if determinable, are eliminated from the accounts and the gain or loss is recognized. Repair and maintenance costs are generally charged to expense as incurred; however, overhauls related to large-scale maintenance projects are deferred when incurred and amortized into contract drilling expense over a 36-month period. Drilling equipment and facilities are depreciated using the straight-line method over the estimated useful lives as of the in-service date or date of major refurbishment. Estimated useful lives of our drilling equipment range from three to twenty-five years. Other property and equipment is depreciated using the straight-line method over useful lives ranging from two to twenty years.
Impairment of Long-lived Assets
We evaluate the realization of our long-lived assets, including property and equipment and goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate goodwill on at least an annual basis. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair value. Prior to an impairment loss being recognized, an independent appraisal would be performed to determine the asset’s estimated fair value. An impairment loss on our goodwill exists when the carrying amount of the goodwill exceeds its implied fair value, as determined pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. No impairment losses were recorded on our property and equipment or goodwill balances during the years ended December 31, 2004, 2003 and 2002.
However, on March 31, 2002, we recognized an impairment loss of $9,758,000 on an investment in equity securities resulting from a decline in value considered by management to be other than temporary. There were no other impairment losses during the years ended December 31, 2004, 2003 and 2002.
Insurance Reserves
We maintain insurance coverage against certain marine liabilities, including liability for physical damage to our drilling rigs and personal injury to our drilling crews. Our marine package policy insures us for physical damage to our drilling rigs up to the fair value of each rig. During 2004, we retained the first $10,000,000 per occurrence under this policy. Our protection and indemnity policy insures us for personal injury to our drilling
crews. Since February 2004, our protection and indemnity policy has had a standard deductible of $1,000,000 per occurrence and we retain $5,000,000 of claims in the aggregate beyond the standard deductible. From January 2002 through January 2004, we had a standard deductible of $100,000 per occurrence and we retained $7,250,000 of claims in the aggregate beyond the standard deductible. We accrue for these deductibles during the year and the insurance retention reserve is adjusted based on our actual claims losses during the year.
Revenue Recognition
Revenues generated from our dayrate-basis drilling contracts, labor contracts, and engineering services and project management engagements are recognized as services are performed. We may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize an offshore rig from one market to another are recognized over the term of the related drilling contract. Costs incurred to relocate drilling units to more promising geographic areas in which a contract has not been secured are expensed as incurred. Lump-sum payments received from customers relating to specific contracts are deferred and amortized to income over the term of the drilling contract. We record reimbursements from customers for “out-of-pocket” expenses as revenues and the related cost as direct operating expenses.
Income Taxes
Noble is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted, or in which Noble and/or its subsidiaries are considered resident for income tax purposes. Applicable U.S. and foreign income and withholding taxes have not been provided on undistributed earnings of Noble’s subsidiaries. We do not intend to repatriate such undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material. In certain circumstances, we expect that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax liability has been recognized in these circumstances. Should our expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly. Our recognition of a deferred tax liability in these circumstances would not have had a material effect on our results of operations for 2004, 2003 or 2002, and would have had no effect on our liquidity or our cash flows.
For additional information on our accounting policies, see Note 1 to our accompanying consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123 (revised 2004)”). SFAS 123 (revised 2004) is a revision to SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123 (revised 2004) establishes standards for accounting for exchanges of an entity’s equity instruments for goods or services, focusing primarily on transactions in which an entity obtains employee services in share-based payment transactions. The statement requires that entities measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and that the cost is recognized over the period in which the employee services are performed, which is usually the equity instrument’s vesting period. SFAS 123 (revised 2004) eliminates the alternative allowed under SFAS 123 in which equity instruments could be measured at their intrinsic value, as prescribed by APB Opinion 25, with only pro forma disclosure in the entity’s notes to its financial statements of the impact on net income and earnings per share had the equity instruments been measured at fair value. SFAS 123 (revised 2004) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The impact that the adoption of SFAS 123 (revised 2004) will have on our consolidated results of operations will be determined primarily by the number of stock options issued to employees in future periods. Based on recent stock option issuances, we estimate that the adoption of this statement will reduce annual net income by approximately $3,000,000 to $5,000,000, or $.02 to $.04 per diluted share. We do not expect the adoption of SFAS 123 (revised 2004) to have a material impact on our consolidated cash flows or financial position.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the potential for loss due to a change in the value of a financial instrument as a result of fluctuations in interest rates, currency exchange rates or equity prices. We own investments in both marketable equity and debt securities. To mitigate the risk of losses, these investments are marked to market and are monitored by management to assure compliance with policies established by the Company. Under the Noble Drilling Corporation 401(k) Savings Restoration Plan, certain highly compensated employees may elect to defer compensation into the plan and invest among several alternatives, primarily mutual funds. Any change in the fair value of these investments would result in a comparable change in the deferred compensation plan obligation.
We are subject to market risk exposure related to changes in interest rates on our Credit Agreement. Interest on our Credit Agreement is at an agreed upon percentage point spread from LIBOR. At December 31, 2004, there were $100,000,000 of outstanding borrowings under our Credit Agreement. An immediate change of one percent in the interest rate would cause a $1,000,000 change in interest expense on an annual basis.
Although we conduct business internationally, a substantial majority of the value of our foreign transactions are denominated in U.S. Dollars. With minor exceptions, we structure our drilling contracts in U.S. Dollars to mitigate our exposure to fluctuations in foreign currencies. Other than trade accounts receivable and trade accounts payable, which mostly offset each other, we do not currently have any significant assets, liability or financial instruments that are sensitive to foreign currency exchange rates.
We periodically enter into derivative instruments to manage our exposure to fluctuations in interest rates and foreign currency exchange rates, and we may conduct hedging activities in future periods to mitigate such exposure. Our North Sea operations have a significant amount of their cash operating expenses payable in either the Euro or British Pound. To reduce our exposure to fluctuations in these currencies during 2004, we entered into forward contracts in March and April 2004 to purchase 1,400,000 Euros and 1,200,000 British Pounds, respectively, per month for the months April 2004 through December 2004. These forward contracts represented approximately 50 percent of our forecasted Euro and British Pound requirements for 2004 after the respective dates on which we entered into the forward contracts. These forward contracts were accounted for as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133), and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Because all of these forward contracts expired during 2004, there is no cumulative net unrealized gain or loss on these contracts included in “Accumulated other comprehensive income” in our Consolidated Balance Sheet at December 31, 2004. We did not recognize a gain or loss due to hedge ineffectiveness in our Consolidated Statements of Income during 2004 related to these forward contracts. We did not utilize any derivative financial instruments or undertake any hedging activities in 2003 or 2002.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed in this Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2004 and 2003
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2004
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2004
Consolidated Statements of Shareholders’ Equity for each of the
three years in the period ended December 31, 2004
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 2004
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Noble Corporation:
We have completed an integrated audit of Noble Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows, of shareholders’ equity and of comprehensive income present fairly, in all material respects, the financial position of Noble Corporation and its subsidiaries (the “Company”) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Houston, Texas
March 8, 2005
NOBLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Noble Corporation (“Noble” or, together with its consolidated subsidiaries, unless the context requires otherwise, the “Company”, “we”, “our” and words of similar import) is primarily engaged in contract drilling services in key markets worldwide. We provide technologically advanced drilling-related products and services designed to create value for all our customers. We also provide labor contract drilling services, well site and project management services, and engineering services. Our operations are conducted in the Middle East, U.S. Gulf of Mexico, Mexico, the North Sea, Brazil, West Africa, India, the Mediterranean Sea and Canada.
Consolidation
The consolidated financial statements include the accounts of Noble and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates where we have a significant influence but not a controlling interest. (See Note 6.)
In connection with the preparation of the 2004 financial statements, we concluded that it was appropriate to classify our auction rate securities as marketable debt securities and include such investments in “Investments in marketable securities” on our Consolidated Balance Sheets. Previously, such investments had been classified as cash equivalents and included in “Cash and cash equivalents.” Accordingly, we have revised the classification in 2003 to report $76,900,000 of these securities as “Investments in marketable securities” in the Consolidated Balance Sheet at December 31, 2003 and made corresponding adjustments to the Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002 to reflect the beginning of year and end of year balances of cash and cash equivalents and to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. For the years ended December 31, 2003 and 2002, net cash provided by (used for) investing activities related to these current investments of $52,800,000 and $(1,200,000), respectively, was previously included in cash and cash equivalents in our Consolidated Statements of Cash Flows. This revision in classification does not affect previously reported net cash provided by operating activities or net cash (used for) provided by financing activities, or our previously reported Consolidated Statements of Income for any period.
Certain other reclassifications have been made in prior year consolidated financial statements to conform to the classifications used in the 2004 consolidated financial statements. These reclassifications have no impact on net income.
Foreign Currency Translation
We follow a translation policy in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. In international locations where the U.S. Dollar has been designated as the functional currency (based on an evaluation of such factors as the markets in which the subsidiary operates, inflation, generation of cash flow, financing activities and intercompany arrangements), local currency transaction gains and losses are included in net income. In international locations where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. Dollar are included in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. We did not recognize any material gains or losses on foreign currency transactions or translations during the years ended December 31, 2004, 2003 and 2002. We use the Canadian Dollar and British Pound, respectively, as the functional currency for our labor contract drilling services in Canada and the North Sea.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and all highly liquid investments with original maturities of three months or less. Our cash, cash equivalents and short-term investments
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are subject to potential credit risk. Our cash management and investment policies restrict investments to lower risk, highly liquid securities and we perform periodic evaluations of the relative credit standing of the financial institutions with which we conduct business.
In accordance with SFAS No. 95, Statement of Cash Flows, cash flows from our labor contract drilling services in Canada and the United Kingdom are calculated based on their respective local functional currencies. As a result, amounts related to assets and liabilities reported on the Consolidated Statements of Cash Flows will not necessarily agree with changes in the corresponding balances on the Consolidated Balance Sheets. The effect of exchange rate changes on cash balances held in foreign currencies was not material in 2004, 2003 or 2002.
Investments in Marketable Securities
Our investments in marketable debt securities included auction rate securities of $41,400,000 and $76,900,000 at December 31, 2004 and 2003, respectively. These auction rate securities are recorded at cost, which approximates fair value due to their variable interest rates, which interest rates reset within a period of less than 60 days. Although these securities have long-term stated contractual maturities, we have the ability to quickly liquidate these securities. As a result, we classify these securities as current investments. Because these securities are recorded at cost, which approximates fair value, we had no realized or unrealized gains or losses related to these securities during the years ended December 31, 2004, 2003 and 2002. All income related to these current investments was recorded as interest income.
Derivative Instruments and Hedging Activities
We periodically enter into derivative instruments to manage our exposure to fluctuations in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for trading purposes. We designate and assign the financial instruments as hedges of specific assets, liabilities or anticipated transactions. Cash flows from hedge transactions are classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.
Our North Sea operations have a significant amount of their cash operating expenses payable in either the Euro or British Pound. To reduce our exposure to fluctuations in these currencies during 2004, we entered into forward contracts in March and April 2004 to purchase 1,400,000 Euros and 1,200,000 British Pounds, respectively, per month for the months April 2004 through December 2004. These forward contracts represented approximately 50 percent of our forecasted Euro and British Pound requirements for 2004 after the respective dates on which we entered into the forward contracts. These forward contracts were accounted for as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133), and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Because all of these forward contracts expired during 2004, there is no cumulative net unrealized gain or loss on these contracts included in “Accumulated other comprehensive income” in our Consolidated Balance Sheet at December 31, 2004. We did not recognize a gain or loss due to hedge ineffectiveness in our Consolidated Statements of Income during 2004 related to these forward contracts. We did not utilize any derivative financial instruments or undertake any hedging activities in 2003 or 2002.
Inventories
Inventories consist of spare parts, material and supplies held for consumption and are stated principally at the lower of average cost or fair value.
Property and Equipment
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. At December 31, 2004 and 2003, there was $469,623,000 and $361,663,000, respectively, of construction in progress. Such amounts are included in “Drilling equipment and facilities” in the accompanying Consolidated Balance Sheets. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost and related accumulated depreciation, if determinable, are eliminated from the accounts and the gain or loss is recognized.
Scheduled maintenance of equipment and overhauls are performed on the basis of number of hours operated in accordance with our preventative maintenance program. Repair and maintenance costs are generally charged to expense as incurred; however, overhauls related to large-scale maintenance projects are deferred when incurred and amortized into contract drilling services expense over a 36-month period. The deferred portion of these large-scale maintenance projects is included in “Other assets” in the Consolidated Balance Sheets. Such amounts totaled $88,621,000 and $56,575,000 at December 31, 2004 and 2003, respectively. Total maintenance and repair expenses for the years ended December 31, 2004, 2003 and 2002 were $154,018,000, $122,105,000 and $110,788,000, respectively. Drilling equipment and facilities are depreciated using the straight-line method over the estimated remaining useful lives as of the in-service date or date of major refurbishment. Estimated useful lives of our drilling equipment range from three to twenty-five years. Other property and equipment is depreciated using the straight-line method over useful lives ranging from two to twenty years.
We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair value. Prior to an impairment loss being recognized, an independent appraisal would be performed to determine the asset’s estimated fair value. No material impairment losses were recorded on our property and equipment balances during the years ended December 31, 2004, 2003 and 2002.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Assets
We evaluate the realization of our goodwill on at least an annual basis, and on our remaining long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss on our goodwill exists when the carrying amount of the goodwill exceeds its implied fair value, as determined pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Our goodwill balance was $14,638,000 and $13,138,000 at December 31, 2004 and 2003, respectively. All of our goodwill is attributable to our engineering and consulting services segment. The increase in goodwill during 2004 of $1,500,000 was attributable to an earn-out payment for certain operating performance milestones achieved by the Well Director™ drilling tools, which we acquired in 2002. See Note 3 to our accompanying consolidated financial statements for additional information. No impairment losses were recorded on our goodwill balances during the years ended December 31, 2004, 2003 and 2002.
On March 31, 2002 we recognized an impairment loss of $9,758,000 on an investment in marketable securities resulting from a decline in value considered by management to be other than temporary. There were no other impairment losses during the years ended December 31, 2004, 2003 and 2002.
Deferred debt issuance costs, which totaled $2,194,000 and $2,839,000 at December 31, 2004 and 2003, respectively, are being amortized over the life of the debt securities. Amortization related to debt issuance costs was $645,000, $1,016,000 and $1,664,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Debt issuance costs are amortized using the straight-line method, which approximates the interest method. The amortization of debt issuance costs is included in interest expense.
Insurance
We maintain insurance coverage against certain marine liabilities, including liability for physical damage to our drilling rigs and personal injury to our drilling crews. Our marine package policy insures us for physical damage to our drilling rigs up to the fair value of each rig. During 2004 and 2003, we retained the first $10,000,000 per occurrence under this policy. In 2002, we retained the first $1,000,000 per occurrence and continued to retain a portion of each loss in excess of $1,000,000 to a maximum of $10,000,000. Our protection and indemnity policy insures us for personal injury to our drilling crews. Since February 2004, our protection and indemnity policy has had a standard deductible of $1,000,000 per occurrence and we retain $5,000,000 of claims in the aggregate beyond the standard deductible. From January 2002 through January 2004, we had a standard deductible of $100,000 per occurrence and we retained $7,250,000 of claims in the aggregate beyond the standard deductible. We accrue for these deductibles during the year and the insurance retention reserve is adjusted based on our actual claims losses during the year. Prepaid insurance is amortized over the terms of our insurance policies.
Revenue Recognition
Revenues generated from our dayrate-basis drilling contracts, labor contracts, technologically advanced drilling-related products, engineering services and project management engagements are recognized as services are performed.
We may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize an offshore rig from one market to another are recognized over the term of the related drilling contract. Costs incurred to relocate drilling units to more promising geographic areas in which a contract has not been secured are expensed as incurred. Lump-sum payments received from customers relating to specific contracts are deferred and amortized to income over the term of the drilling contract.
We record reimbursements from customers for “out-of-pocket” expenses as revenues and the related cost as direct operating expenses.
Income Taxes
Noble is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the laws and rates in effect in the countries in which
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operations are conducted, or in which Noble and/or its subsidiaries are considered resident for income tax purposes. Applicable U.S. and foreign income and withholding taxes have not been provided on undistributed earnings of Noble’s subsidiaries. We do not intend to repatriate such undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material. In certain circumstances, we expect that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax liability has been recognized in these circumstances. Should our expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly. Our recognition of a deferred tax liability in these circumstances would not have had a material effect on our results of operations for 2004, 2003 or 2002, and would have had no effect on our liquidity or our cash flows.
Concentration of Credit Risk
The market for our services is the offshore oil and gas industry, and our customers consist primarily of government-owned oil companies, major integrated oil companies and independent oil and gas producers. We perform ongoing credit evaluations of our customers and generally do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial condition should be considered in light of the fluctuations in demand experienced by drilling contractors as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial condition as supply and demand factors directly affect utilization and dayrates, which are the primary determinants of our net cash provided by operating activities.
In 2004, one customer accounted for $150,017,000 or 14 percent of consolidated operating revenues, of which all was included in our international contract drilling services segment. Another customer accounted for $105,405,000 or 10 percent of consolidated operating revenues, of which all was also included in our international contract drilling services segment. No other customer accounted for more than 10 percent of consolidated operating revenues in 2004. In 2003, one customer accounted for $138,254,000 or 14 percent of consolidated operating revenues, of which all was included in our international contract drilling services segment. Another customer accounted for $129,473,000 or 13 percent of consolidated operating revenues, of which all was included in our international contract drilling services segment. No other customer accounted for more than 10 percent of consolidated operating revenues in 2003. In 2002, one customer accounted for $149,258,000 or 15 percent of consolidated operating revenues, of which $97,431,000 was included in our domestic contract drilling services segment, $51,064,000 was included in our international contract drilling services segment and $763,000 was included in our engineering and consulting services segment. Another customer accounted for $123,251,000 or 12 percent of consolidated operating revenues, of which all was included in our international contract drilling services segment. No other customer accounted for more than 10 percent of consolidated operating revenues in 2002.
Net Income Per Share
We compute and present earnings per share in accordance with SFAS No. 128, Earnings Per Share. Net income per share has been computed on the basis of the weighted average number of ordinary shares and, where dilutive, ordinary share equivalents outstanding during the indicated periods.
The following table summarizes the basic and diluted earnings per share computations for net income for the years ended December 31, 2004, 2003 and 2002:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in diluted shares are ordinary share equivalents relating primarily to outstanding stock options covering 1,218,000, 1,059,000 and 1,248,000 shares for the years ended December 31, 2004, 2003 and 2002, respectively. The computation of diluted earnings per share for 2004, 2003 and 2002 did not include options to purchase 100,000, 1,804,000 and 1,913,432 ordinary shares, respectively, because the options’ exercise prices were greater than the average market price of the ordinary shares.
Supplemental Cash Flow Information
Stock-Based Compensation Plans
We have several stock-based compensation plans, which are described below. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS 148”), we have chosen to continue using the intrinsic value method of accounting for stock-based compensation awards in accordance with APB Opinion 25. No compensation expense was recognized in 2004, 2003 and 2002 related to stock option awards. For U.S. federal income tax purposes, we realized a reduction in income taxes related to the exercises of employee stock options of $11,840,000, $820,000 and $4,664,000 in the years ended December 31, 2004, 2003 and 2002, respectively.
SFAS 123 was revised in December 2004 and the intrinsic method of valuing stock-based compensation awards will no longer be allowed effective with the first interim or annual reporting period that begins after June 15, 2005. See the “Accounting Pronouncements” section of this Note 1 for additional information related to the revision of SFAS 123.
1991 Stock Option and Restricted Stock Plan
Our 1991 Stock Option and Restricted Stock Plan, as amended (the “1991 Plan”), provides for the granting of options to purchase our ordinary shares, with or without stock appreciation rights, and the awarding of restricted shares to selected employees. At December 31, 2004, 3,964,803 shares were available for grant or award under the 1991 Plan. In general, all options granted under the 1991 Plan have a term of 10 years, an exercise price equal to the fair market value of an ordinary share on the date of grant and vest one-third annually, commencing one year after the grant date.
1992 Nonqualified Stock Option Plan
Our 1992 Nonqualified Stock Option Plan for Non-Employee Directors (the “1992 Plan”) provides for the granting of nonqualified stock options to non-employee directors of Noble. At December 31, 2004, 234,500 shares were available for grant under the 1992 Plan. We grant options at fair market value on the grant date. The options are exercisable from time to time over a period commencing one year from the grant date and ending on the expiration of 10 years from the grant date, unless terminated sooner as described in the 1992 Plan.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of our stock options under both the 1991 Plan and 1992 Plan as of December 31, 2004, 2003 and 2002 and the changes during the year ended on those dates is presented below (actual amounts):
The following table summarizes information about stock options outstanding at December 31, 2004 (actual amounts):
Additional disclosures required by SFAS 123 are as follows:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects pro forma net income and earnings per share had we elected to adopt the fair value approach of SFAS 123:
Other Stock Based Compensation
In January 1998, we awarded selected employees 22,000 restricted (i.e., nonvested) shares that vested 20 percent per year over a five-year period commencing on the first anniversary date of the award. In January 1999, we awarded one employee 15,000 restricted shares that vested one-third per year over a three-year period commencing on the first anniversary date of the award. In February 1999 and October 1999, we awarded selected employees 190,000 restricted shares and 230,000 restricted shares, respectively, that vested 20 percent per year over a five-year period commencing on the first anniversary date of the award. In September 2000, we awarded one employee 25,000 restricted shares that vest 20 percent per year over a five-year period commencing on the first anniversary date of the award. In October 2000 and October 2001, we awarded selected employees 227,500 restricted shares and 215,500 restricted shares, respectively, that vest 20 percent per year over a five-year period commencing on the first anniversary date of the award. No restricted shares were awarded in 2002 or 2003. In April 2004, we awarded selected employees 95,237 restricted shares that vest one-third per year over a three-year period commencing on the first anniversary date of the award. In April 2004, we also awarded selected employees performance restricted shares that have a three-year performance period from the date of award. The actual number of shares awarded and available for vesting may vary depending on the degree of achievement of certain specified corporate performance criteria over the three-year performance period. The number of shares awarded as so determined then vests (subject only to future employment) at the rate of one-third thereof in April of each succeeding year. The maximum number of shares available for award is 142,852. Nonvested shares will be forfeited.
A summary of the restricted share awards and the amounts recognized as compensation expense for the years ended December 31, 2004, 2003 and 2002 is as follows:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Put Options on Ordinary Shares
During 2002, we sold “European-style put options” covering 1,300,000 of our ordinary shares in 12 separate private transactions (11 transactions of 100,000 put options each and another transaction of 200,000 put options) at an average price paid to us of $2.81 per option. “European-style” options give the holder the right to require us to purchase our ordinary shares from the holder at their respective exercise prices on their respective expiration dates, whereas “American-style” options can be exercised any time up to, and including, the respective exercise dates. Upon exercise of the options by the holder, we had the option to settle in cash or net shares of Noble. The strike price under each option represented between 90 and 95 percent of the spot price of the ordinary shares at the date of the transaction. Of the 1,300,000 options sold during 2002, 300,000 expired unexercised and 400,000 were exercised during 2002, which resulted in 600,000 options outstanding at December 31, 2002. All of these options expired unexercised in the first quarter of 2003. At December 31, 2004 and 2003, we had no put options outstanding to purchase any of our ordinary shares.
Certain Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 estimates.
Accounting Pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123 (revised 2004)”). SFAS 123 (revised 2004) is a revision to SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123 (revised 2004) establishes standards for accounting for exchanges of an entity’s equity instruments for goods or services, focusing primarily on transactions in which an entity obtains employee services in share-based payment transactions. The statement requires that entities measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and that the cost is recognized over the period in which the employee services are performed, which is usually the equity instrument’s vesting period. SFAS 123 (revised 2004) eliminates the alternative allowed under SFAS 123 in which equity instruments could be measured at their intrinsic value, as prescribed by APB Opinion 25, with only pro forma disclosure in the entity’s notes to its financial statements of the impact on net income and earnings per share had the equity instruments been measured at fair value. SFAS 123 (revised 2004) is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The impact that the adoption of SFAS 123 (revised 2004) will have on our consolidated results of operations will be determined primarily by the number of stock options issued to employees in future periods. Based on recent stock option issuances, we estimate that the adoption of this statement will reduce annual net income by approximately $3,000,000 to $5,000,000, or $.02 to $.04 per diluted share. We do not expect the adoption of SFAS 123 (revised 2004) to have a material impact on our consolidated cash flows or financial position.
NOTE 2 - CORPORATE RESTRUCTURING
On April 30, 2002, Noble became the successor to Noble Drilling Corporation, a Delaware corporation (which we sometimes refer to as “Noble Drilling”), as part of the internal corporate restructuring of Noble Drilling and its subsidiaries approved by stockholders of Noble Drilling. The restructuring was accomplished through the merger of an indirect, wholly-owned subsidiary of Noble Drilling into Noble Drilling. Noble Drilling was the surviving entity in the merger and is now an indirect, wholly-owned subsidiary of Noble. In addition, as a result of the merger, all of the outstanding shares of common stock (and the related preferred stock purchase rights) of Noble Drilling were exchanged for ordinary shares (and related preferred share purchase rights) of Noble. We accounted for the restructuring as a reorganization of entities under common control. Consequently, the consolidated amounts of assets, liabilities and shareholders’ equity did not change as a result of the restructuring.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
In October 2004, we exercised our option to purchase the Noble David Tinsley (formerly Maersk Valiant) jackup rig for an exercise price of $28,400,000. In June 2003, we paid an option fee of $13,200,000 for the right to acquire the unit. Our aggregate purchase price for the rig was therefore $41,600,000.
In July 2004, we exercised our option to purchase the Noble Cees van Diemen (formerly Maersk Viking) jackup rig for an exercise price of $32,900,000. In June 2003, we paid an option fee of $15,000,000 for the right to acquire the unit. Our aggregate purchase price for the rig was therefore $47,900,000.
In June 2004, we purchased the Noble Mark Burns (formerly Okhi) jackup rig for $29,500,000 in cash.
In September 2003, we exercised our option to purchase the Noble Charlie Yester (formerly Trident 18) jackup rig from a subsidiary of Schlumberger Limited for an exercise price of $32,900,000 in cash. In December 2002, we had paid an option fee of $14,100,000 in cash for the right to acquire the unit. Our aggregate purchase price for the rig was therefore $47,000,000. In July 2003, we exercised our option to purchase the Noble Gene House (formerly Trident 19) jackup rig from this subsidiary of Schlumberger for an exercise price of $25,200,000 in cash. In December 2002, we had paid an option fee of $10,800,000 in cash for the right to acquire the unit. Our aggregate purchase price for this rig was therefore $36,000,000. In December 2002, we purchased two jackup rigs, the Dhabi II and Noble Roy Rhodes (formerly Trident III), also from this subsidiary of Schlumberger, for an aggregate purchase price of $95,000,000 in an all cash transaction.
On May 3, 2002, as part of our strategy to expand our technology initiative, we made several acquisitions. We acquired all of the shares of WELLDONE Engineering GmbH (“WELLDONE”) for $5,750,000 in cash plus an agreement to pay an earn-out amount up to $3,500,000 provided WELLDONE’s tools achieve certain operational and financial milestones during the period through May 3, 2004, of which $500,000 was paid in 2003. We did not pay any of the remaining $3,000,000, as these milestones were not achieved. WELLDONE’s primary asset is its ownership in the “Well Director™”, an automatic rotary steerable drilling system, which was designed by and is manufactured and marketed through DMT WELLDONE Drilling Services GmbH (“DMT WELLDONE”). As a result of our acquisition of WELLDONE, we acquired WELLDONE’s 50 percent joint venture interest in DMT WELLDONE, which is further described below. We paid $2,650,000 to Deutsche Montan Technologie GmbH (“DMT”), the other joint venturer in DMT WELLDONE, for the remaining 50 percent interest in the joint venture.
In connection with the above described transaction, we also acquired 24 Well DirectorTM drilling tools and related assets owned by Phoenix Technology Services, Ltd. (“Phoenix”) for $6,000,000 in cash plus an agreement to pay an earn-out amount up to $3,000,000 provided certain operating performance milestones are achieved during the period through May 3, 2005, of which $1,500,000 and $500,000 was paid in 2004 and 2003, respectively. In the transaction we also acquired from Phoenix its worldwide marketing rights to the Well DirectorTM drilling tools. The aggregate purchase price of $14,400,000 for these related acquisitions was allocated to goodwill ($7,863,000) and property and equipment ($6,537,000).
Pursuant to a related agreement, we and DMT each committed to fund 2,100,000 Euros to a new joint venture in which each party has a 50 percent interest. The joint venture was to use such funds to retain DMT to conduct research and development. This joint venture was terminated in 2003.
On March 27, 2002, we purchased two semisubmersible baredecks, Bingo 9000 Rig 3 and Bingo 9000 Rig 4, from subsidiaries of Ocean Rig ASA (“Ocean Rig”) for an aggregate purchase price of $45,000,000 in an all cash transaction.
On March 26, 2002, we purchased two semisubmersible drilling rigs, the Noble Lorris Bouzigard (formerly Transocean 96) and Noble Therald Martin (formerly Transocean 97), from subsidiaries of Transocean Inc. for an aggregate purchase price of $31,000,000 in an all cash transaction. During 2003, we completed upgrades to the living quarters and drilling equipment on both units.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - MARKETABLE SECURITIES
As of December 31, 2004 and 2003, we owned marketable equity securities with a fair market value of $528,000 and $9,703,000, respectively, of which $9,458,000 of the December 31, 2003 balance was included in a Rabbi Trust for the Noble Drilling Corporation 401(k) Savings Restoration Plan. This Rabbi Trust was liquidated and terminated in December 2004. The marketable securities included in the Rabbi Trust were classified as trading securities and were included in “Investment in marketable securities” in the Consolidated Balance Sheet at December 31, 2003 at their fair market value. Upon liquidation of the Rabbi Trust, we recognized in earnings a net realized gain of $895,000 related to these assets in 2004. The remaining investment in marketable equity securities at December 31, 2004 is classified as available for sale and is included in “Other assets” in the Consolidated Balance Sheet at its fair market value. On March 31, 2002, we recognized in earnings a realized loss of $9,758,000 on this investment resulting from a decline in value considered by management to be other than temporary. We recognized in other comprehensive income an unrealized holding gain of $283,000 on this investment during 2004. Gross unrealized holding losses on this investment at December 31, 2004 and 2003 were $681,000 and $964,000, respectively, and are included in “Accumulated other comprehensive income” in the Consolidated Balance Sheets.
As of December 31, 2004 and 2003, we owned marketable debt securities with a fair market value of $132,788,000 and $165,818,000, respectively. These investments are classified as available for sale and are included in “Investment in marketable securities” in the Consolidated Balance Sheets at their fair market value. Our balance of marketable debt securities at December 31, 2004 includes $33,280,000 that mature within one year, $61,008,000 that mature between one and five years and $38,500,000 that mature beyond five years. We recognized in other comprehensive income a net unrealized holding loss of $773,000 and in earnings a net realized loss of $129,000 related to these investments in 2004. In 2003 and 2002, we recognized realized losses on these securities of $382,000 and $168,000, respectively. Realized gains and losses on sales of marketable securities are based on the specific identification method. The following table highlights additional information applicable to our investments in marketable debt securities classified as available for sale as of December 31, 2004 and 2003:
The credit quality of each of our investments in marketable debt securities is rated no lower than “A” or “A2” by Standard & Poor’s and Moody’s Investors Service (“Moody’s”), respectively.
NOTE 5 - COMPREHENSIVE INCOME
We report and display comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income (“SFAS 130”), which establishes standards for reporting and displaying comprehensive income and its components. Components of comprehensive income are net income and all changes in equity during the period except those resulting from transactions with owners. SFAS 130 requires enterprises to display comprehensive income and its components in the enterprise’s financial statements, to classify items of comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income in shareholders’ equity separately from retained earnings and additional paid-in capital.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the components of accumulated other comprehensive income (loss):
Included in the 2002-period change for unrealized (losses) gains on securities above was a reclassification adjustment of $9,758,000 for an impairment charge on an investment included in net income resulting from a decline in value considered by management to be other than temporary.
NOTE 6 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
On June 13, 2000, we formed Noble Crosco Drilling Ltd. (“Noble Crosco”) with our joint venture partner. We acquired a 50 percent equity interest in Noble Crosco by investing $14,300,000 in cash. Our joint venture partner contributed the Panon, a Levingston 111-S independent leg designed jackup, for its 50 percent equity interest. We also agreed to lend Noble Crosco up to $7,000,000 pursuant to a credit agreement (the “Noble Crosco Credit Agreement”) to finance part of the upgrade costs of the Panon. In 2001, we loaned Noble Crosco $7,000,000 under the Noble Crosco Credit Agreement. Any funds required for the maintenance and operation of the Panon in excess of those funds generated from operations of the joint venture and available under the Noble Crosco Credit Agreement would be loaned by us to Noble Crosco. In 2001, we loaned Noble Crosco $4,800,000 of such funds. At December 31, 2004, the balance due to us from Noble Crosco under the Noble Crosco Credit Agreement and the additional loan in excess of the Noble Crosco Credit Agreement had been repaid. We managed the upgrade of the Panon from a slot to a cantilever configuration, and we are managing the operation of the unit. During 2004, we received distributions from Noble Crosco related to the operations of the Panon of $2,700,000. We account for this investment using the equity method.
Balances related to joint ventures for 2004 and 2003 are reflected in the table below:
NOTE 7 - DEBT
In 2002, we borrowed $125,000,000 from our $300,000,000 bank credit facility, of which $25,000,000 was repaid during 2004 . In November 2004, we amended our bank credit facility to increase the total commitment to $300,000,000 from $200,000,000 and extend the maturity date to November 30, 2009 from May 30, 2006. Deferred costs related to this amendment were $475,000, which are being amortized over the remaining term of the bank
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credit facility. The interest rate on this borrowing from our bank credit facility, which adjusts periodically with LIBOR, was 3.46 percent at December 31, 2004. (See Note 8 for additional information.)
On March 16, 1999, we issued $150,000,000 principal amount of our 6.95% Senior Notes due 2009 and $250,000,000 principal amount of our 7.50% Senior Notes due 2019 (together, the “Notes”). Interest on the Notes is payable on March 15 and September 15 of each year. The Notes are redeemable, as a whole or from time to time in part, at our option on any date prior to maturity at prices equal to 100 percent of the outstanding principal amount of the notes redeemed plus accrued interest to the redemption date plus a make-whole premium, if any is required to be paid. The Notes are senior unsecured obligations and the indenture governing the Notes contains covenants that, among other things, limit our ability to create certain liens, engage in certain sale and lease-back transactions and merge, consolidate and sell assets, except under certain conditions.
In 2002, we purchased and retired $5,000,000 principal amount of our 7.50% Senior Notes due 2019 for $5,350,000, which resulted in a loss of $400,000. This loss represents the difference between the acquisition price and the net carrying value of the notes purchased, including unamortized debt issuance costs, and was included in “Other, net” in the Consolidated Statement of Income in 2002. Prior to 2002, we purchased and retired $43,305,000 principal amount of our 7.50% Senior Notes.
In connection with the acquisition of a majority interest in Arktik Drilling Limited, Inc. (“Arktik”) in 1999, we recorded Arktik’s indebtedness to a minority equity owner in Arktik in the amount of $7,900,000 (the “Minority Owner Debt”). Arktik’s principal asset is the Noble Muravlenko drillship. We repaid the Minority Owner Debt in full in March 2004.
In December 1998, Noble Drilling (Jim Thompson) Inc., an indirect, wholly-owned subsidiary of Noble and owner of the Noble Jim Thompson, issued $115,000,000 principal amount of its fixed rate senior secured notes (the “Thompson Notes”) in four series. The Thompson Notes bear interest at rates of 5.93 percent to 7.25 percent per annum. The Thompson Notes are secured by a first naval mortgage on the Noble Jim Thompson, are guaranteed by Noble, and can be prepaid, in whole or in part, at a premium at any time.
In July 1998, Noble Drilling (Paul Wolff) Ltd., an indirect, wholly-owned subsidiary of Noble and owner of the Noble Paul Wolff, issued $145,000,000 principal amount of its fixed rate senior secured notes (the “Wolff Notes”) in three series. We repaid the Wolff Notes in full in December 2004.
The following table summarizes our long-term debt:
The fair value of our Senior Notes at December 31, 2004 was $402,891,000, based on the quoted market prices for similar issues or on the current rates offered to us for debt of similar remaining maturities. The fair value of the indebtedness outstanding under our floating interest rate Bank Credit Facility and Project Financings approximates their carrying values.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate principal repayments of long-term debt for the next five years and thereafter are as follows:
NOTE 8 - CREDIT FACILITIES
We have an unsecured revolving bank credit facility totaling $300,000,000 (the “Credit Agreement”), including a letter of credit facility totaling $50,000,000, through November 30, 2009. In November 2004, we amended the Credit Agreement to increase the total commitment to $300,000,000 from $200,000,000 and extend the maturity date to November 30, 2009 from May 30, 2006. In connection with our restructuring, Noble and one of its wholly-owned subsidiaries, Noble Holding (U.S.) Corporation (“Noble Holding”), have unconditionally guaranteed the performance of Noble Drilling under the Credit Agreement. We are required to maintain various affirmative and negative covenants, including two financial covenants relating to interest coverage and debt to capital ratios. The Credit Agreement contains restrictive covenants, including restrictions on incurring additional indebtedness, and restrictions on permitting additional liens, payment of dividends, transactions with affiliates, and mergers or consolidations. As of December 31, 2004, we had outstanding borrowings and outstanding letters of credit of $100,000,000 and $15,721,000, respectively, under the Credit Agreement, with $184,279,000 remaining available thereunder. Additionally, as of December 31, 2004, we had other letters of credit and third-party guarantees of $35,916,000 and performance and customs bonds totaling $46,949,000 supported by surety bonds.
NOTE 9 - INTERESTS IN DEEPWATER OIL AND GAS PROPERTIES
In 2000, we received interests in several deepwater oil and gas properties from Mariner Energy Inc. and Samedan Oil Corporation pursuant to the settlements of a lawsuit with Mariner Energy and Samedan over employment of the Noble Homer Ferrington semisubmersible and upon entering into a long-term contract with each of these companies for use of the unit in the U.S. Gulf of Mexico. Certain of these properties are currently in production. We reported income before income taxes from such properties of $743,000, $3,246,000 and $2,638,000 in 2004, 2003 and 2002, respectively.
In December 2003, we sold our interest in Mariner Energy’s Green Canyon property to ENI Petroleum for $5,200,000 in cash. We realized a gain of $3,472,000 upon this sale.
In March 2002, we sold our interest in Mariner Energy’s Falcon property to Pioneer Natural Resources USA, Inc. for $6,200,000 in cash and the assumption of liabilities related to our share of drilling and development costs subsequent to June 30, 2001. We realized a gain of $5,908,000 upon this sale.
NOTE 10 - SHAREHOLDERS’ EQUITY
In June 1995, we adopted a stockholder rights plan designed to assure that our stockholders receive fair and equal treatment in the event of any proposed takeover of Noble Drilling and to guard against partial tender offers and other abusive takeover tactics to gain control of Noble Drilling without paying all stockholders a fair price. The rights plan was not adopted in response to any specific takeover proposal. Prior to our corporate restructuring, we amended our rights plan to provide for the earlier expiration of the rights in the event that Noble Drilling merges with a subsidiary company in connection with changing the parent corporation of the Noble corporate group to a non-U.S. company. Immediately prior to such a merger as part of our corporate restructuring, the Noble Drilling stockholder rights plan expired. Upon such merger, a new shareholder rights plan became effective for the new
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
parent company, Noble Corporation, that is substantially similar to the previous Noble Drilling stockholder rights plan. Under the rights plan, one right (“Right”) is attached to each of our ordinary shares. Each Right will entitle the holder to purchase one one-hundredth of a share of new Series A Junior Participating Preferred Shares, par value $1.00 per share, at an exercise price of $120.00. The Rights are not currently exercisable and will become exercisable only in the event a person or group acquires beneficial ownership of 25 percent or more of our ordinary shares. The Rights expire on July 10, 2005.
In connection with our corporate restructuring (see Note 2), treasury shares of Noble Drilling were either cancelled and retired or contributed to trusts for the purpose of Company employee benefit plans. Any ordinary shares of Noble repurchased by it are automatically cancelled and retired pursuant to Cayman Islands law. These employee benefit plan trusts were liquidated and terminated in December 2004. Ordinary shares of Noble held by the trusts were cancelled and retired upon dissolution of the trusts. These trusts held 1,700,000 ordinary shares of Noble at December 31, 2003.
Share repurchases and sales of put options were effected pursuant to the share repurchase program which our board of directors authorized and adopted and which we announced on January 31, 2002. The program authorization covers an aggregate of 15,000,000 ordinary shares. As of March 3, 2005, 9,162,000 shares remained available under this authorization.
NOTE 11 - INCOME TAXES
Noble is a Cayman Islands company. The Cayman Islands does not impose corporate income taxes. Consequently, income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted, or in which Noble and/or its subsidiaries are considered resident for income tax purposes. Our U.S. subsidiaries are subject to a U.S. corporate tax rate of 35 percent.
In certain circumstances, management expects that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax liability has been recognized in these circumstances. Should management’s expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly.
The components of and changes in the net deferred taxes were as follows:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income before income taxes consisted of the following:
The income tax provision consisted of the following:
A reconciliation of statutory and effective income tax rates is shown below:
During 2004, we generated net operating losses (“NOLs”) of $21,767,000 and $53,950,000 for U.S. Regular and Alternative Minimum Tax (“AMT”) purposes, respectively. Our total U.S. NOLs at December 31, 2004 were $59,454,000 for U.S. Regular tax purposes and $136,728,000 for AMT purposes. These NOLs can be carried forward 20 years and begin to expire in 2022. Based on current market conditions, the reversal of temporary differences and forecasts of future U.S. income, we expect to fully utilize these NOLs. Therefore, there is no valuation allowance offsetting the deferred tax asset for these NOLs.
During 2003, we generated NOLs of $23,943,000 and $61,826,000 for U.S. Regular and AMT purposes, respectively. During 2002, we generated NOLs of $13,744,000 and $47,024,000 for U.S. Regular and AMT purposes, respectively. Due to our corporate restructuring in 2002, $13,744,000 of the Regular NOL and $20,952,000 of the AMT NOL were subject to the Separate Return Limitation Year limits and could not be carried back to prior tax years. The remaining AMT NOL of $26,072,000 was carried back to 2001 and generated cash refunds of $5,019,000. Certain components of the Net deferred tax liabilities in the table above were based on our estimates of NOLs and tax credit carryforwards at December 31, 2003. The Net deferred tax liabilities at December 31, 2004 reflect the actual NOLs and tax credit carryforwards from 2003.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We had AMT credit carryforwards of $17,444,000 at December 31, 2004 and 2003. We expect to fully utilize these credits, which can be carried forward indefinitely. Therefore, there is no valuation allowance offsetting this asset. We had foreign tax credit carryforwards of $7,126,000 at December 31, 2004. These credits can be carried forward ten years, and begin to expire in 2010. Because the majority of our international operations are conducted by non-U.S. subsidiaries, we have offset the asset for these credits with a valuation allowance of $4,632,000. Our estimated foreign tax credits and offsetting valuation allowance at December 31, 2003 were $5,959,000 and $3,873,000, respectively.
Certain of our subsidiaries file stand alone tax returns in the U.S. During 2004, these subsidiaries generated NOLs of $4,074,000 for U.S. Regular and AMT purposes. Our total U.S. NOLs at December 31, 2004 for Regular and AMT purposes for these subsidiaries were $21,389,000 and $21,294,000, respectively. Due to insufficient earnings history with these subsidiaries, we have fully offset the deferred tax asset attributable to the U.S. Regular NOLs with a valuation allowance of $7,486,000 and $4,470,000 at December 31, 2004 and 2003, respectively. These NOLs can be carried forward 20 years, and begin to expire in 2023.
During 2004, we recorded a tax benefit of $10,803,000 due to the resolution of certain tax authority audits. Also during 2004, two of our subsidiaries were granted approval by an international tax authority to be taxed on a deemed profit basis in its jurisdiction. We recorded a one-time tax benefit of $4,431,000 due to the change in tax status of these subsidiaries in such jurisdiction.
Due to our ability to redeploy units between Mexico and other jurisdictions, we do not expect our rig-owning subsidiaries operating in Mexico to incur income tax liability in Mexico. Therefore, no deferred tax has been recorded for these subsidiaries. Should our expectations change regarding these subsidiaries, we will adjust deferred taxes accordingly. Our recognition of a deferred tax liability in these circumstances would not have had a material effect on our results of operations for 2004, 2003 or 2002, and would have had no effect on our liquidity or our cash flows.
Applicable U.S. and foreign income and withholding taxes have not been provided on undistributed earnings of $808,000,000 for Noble’s subsidiaries. Management does not intend to repatriate such undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material. It is not practicable to estimate the amount of deferred income taxes associated with these undistributed earnings.
On October 22, 2004, The American Jobs Creation Act of 2004 (“the Act”) was signed into law in the U.S. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations. We have reviewed this incentive under the Act. We believe it is in our best interest to continue to keep these undistributed earnings permanently reinvested outside the U.S. and do not intend to repatriate any undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material.
NOTE 12 - EMPLOYEE BENEFIT PLANS
We have a U.S. noncontributory defined benefit pension plan which covers substantially all salaried employees and a U.S. noncontributory defined benefit pension plan which covers certain field hourly employees, whose initial date of employment is prior to August 1, 2004 (collectively referred to as our “qualified domestic plans”). These plans are governed by the Noble Drilling Corporation Retirement Trust (the “Trust”). The benefits from these plans are based primarily on years of service and, for the salaried plan, employees’ compensation near retirement. These plans qualify under the Employee Retirement Income Security Act of 1974 (“ERISA”), and our funding policy is consistent with funding requirements of ERISA and other applicable laws and regulations. We make cash contributions to the qualified domestic plans when required. The benefit amount that can be covered by the qualified domestic plans is limited under ERISA and the Internal Revenue Code (“IRC”) of 1986. Therefore, we maintain an unfunded, nonqualified excess benefit plan designed to maintain benefits for all employees at the formula level in the qualified domestic plans. We refer to the qualified domestic plans and the excess benefit plan collectively as the “domestic plans.”
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of Noble Drilling (U.K.) Limited, Noble Enterprises Limited and Noble Drilling (Nederland) B.V., all indirect, wholly-owned subsidiaries of Noble, maintains a pension plan which covers all of its salaried, non-union employees (collectively referred to as our “international plans”). Benefits are based on credited service and the average of the highest three years of qualified salary within the past 10 years of participation.
In 2004, we made total fundings of $1,389,000 to our domestic and international pension plans. We made total fundings of $22,155,000 to our domestic and international pension plans in 2003, including a discretionary funding of $17,100,000. During 2002, we made fundings totaling $5,327,000 to our plans. We expect fundings in 2005 to approximate $1,500,000.
All of our plans use December 31 as the measurement date.
A reconciliation of the changes in projected benefit obligations for our international and domestic plans is as follows:
A reconciliation of the changes in fair value of plan assets is as follows:
The funded status of the plans is as follows:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the Consolidated Balance Sheets consist of:
Pension cost includes the following components:
Other information regarding our international and domestic plans is summarized below:
The key assumptions for the plans are summarized below:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The projected benefit obligation for the unfunded excess benefit plan was $8,547,000 and $7,850,000 at December 31, 2004 and 2003, respectively, and is included under “Domestic” in the above tables.
Additional information regarding our qualified domestic plans is summarized below.
The Trust invests in equity securities, fixed income debt securities, and cash equivalents and other short-term investments. The Trust may invest in these investments directly or through pooled vehicles, including mutual funds.
The targeted and actual weighted average asset allocations by asset category for the two U.S. defined benefit pension plans are as follows:
Any deviation from the target range of asset allocations must be approved by the Trust’s governing committee. The performance objective of the Trust is to outperform the return of the Total Index Composite as constructed to reflect the target allocation weightings for each asset class. This objective should be met over a market cycle, which is defined as a period not less than three years or more than five years. Domestic equity securities (common stock, convertible preferred stock and convertible bonds) should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. International equity securities (common stock, convertible preferred stock and convertible bonds), either from developed or emerging markets, should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. Fixed income debt securities should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. Cash equivalent and short-term investments should achieve relative performance better than the 90-day Treasury bills. When mutual funds are used by the Trust, those mutual funds should achieve a total return that equals or exceeds the total return of each fund’s appropriate Lipper or Morningstar category. Lipper and Morningstar are independent mutual fund rating and information services.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For investments in equity securities, no individual options or financial futures contracts are purchased unless approved in writing by the Trust’s governing committee. In addition, no private placements or purchases of venture capital are allowed. No direct investments in foreign securities are made unless available in ADRs on a U.S. exchange. The maximum commitment to a particular industry, as defined by Standard & Poor’s, may not exceed 20 percent. The Trust’s equity managers vote all proxies in the best interest of the Trust without regards to social issues. The Trust’s governing committee reserves the right to comment on and exercise control over the response to any individual proxy solicitation.
For fixed income debt securities, corporate bonds purchased are limited to investment grade securities as established by Moody’s or Standard & Poor’s. At no time shall the lowest investment grade make up more than 20 percent of the total market value of the Trust’s fixed income holdings. The total fixed income exposure from any single non-government or government agency issuer shall not exceed 10 percent of the Trust’s fixed income holdings. The average duration of the total portfolio shall not exceed seven years. All interest and principal receipts are swept, as received, into an alternative cash management vehicle until reallocated in accordance with the Trust’s core allocation.
For investments in cash equivalent and short-term investments, the Trust utilizes a money market mutual fund which invests in U.S. government and agency obligations, repurchase agreements collateralized by U.S. government or agency securities, commercial paper, bankers’ acceptances, certificate of deposits, delayed delivery transactions, reverse repurchase agreements, time deposits and Euro dollar obligations. Bankers’ acceptances shall be made in larger banks (ranked by assets) rated “AA” or better by Moody’s and in conformance with all FDIC regulations concerning capital requirements.
Equity securities include Noble’s ordinary shares in the amounts of $2,736,000 (5% of total Domestic plan assets) and $1,968,000 (4% of total Domestic plan assets) at December 31, 2004, and 2003, respectively. Noble does not expect that it will be required to make a mandatory contribution to its domestic plans in 2005, although Noble has made discretionary contributions in prior years and expects it will consider making a discretionary contribution to its domestic plans in 2005. Estimated benefit payments from our domestic plans are $2,255,000 for 2005, $2,440,000 for 2006, $2,567,000 for 2007, $2,950,000 for 2008, $3,039,000 for 2009 and $17,685,000 in the aggregate for the five years thereafter.
The expected rate of return on plan assets was based on historical returns on each asset type and weighted based on the target asset allocation.
Additional information regarding our international plans is summarized below.
Our international pension plans invest in equity securities, fixed income debt securities, and cash equivalents and other short-term investments.
The weighted average asset allocations by asset category for the international pension plans are as follows:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Both the Noble Enterprises Limited and Noble Drilling (Nederland) B.V. pension plans have a targeted asset allocation of 100 percent debt securities. The investment objective for the Noble Enterprises Limited plan assets is to earn a favorable return against the Salomon Brothers U.S. Government Bond Index for all maturities greater than one year. The investment objective for the Noble Drilling (Nederland) B.V. plan assets is to earn a favorable return against the Salomon Brothers EMU Government Bond Index for all maturities greater than one year. We evaluate the performance of these plans on an annual basis. In establishing an expected rate of return for these plans’ assets, the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and expectations for future returns of each asset class were all considered. The expected return for each class was then weighted based on the target asset allocation (100 percent debt securities for both of these plans at December 31, 2004) to develop the expected long-term rate of return on assets assumption for the plans.
There is no target asset allocation for the Noble Drilling (U.K.) Limited pension plan. However, the investment objectives of the plan, as adopted by the plan’s trustees, is to achieve a favorable return against the Combined Actuarial Performance Service (“CAPS”) pooled fund median. The CAPS pooled fund is a benchmark that attempts to reflect the performance of all pooled pension funds in the United Kingdom. By achieving this objective, the trustees believe the plan will be able to avoid significant volatility in the contribution rate and provide sufficient plan assets to cover the plan’s benefit obligations were the plan to be liquidated. To achieve these objectives, the trustees have given the plan’s investment managers full discretion in the day to day management of the plan’s assets. The plan’s assets are divided between two investment managers. The performance objective communicated to one of these investment managers is to achieve upper quartile performance over a rolling five-year period against the CAPS pooled fund benchmark. The performance objective communicated to the other investment manager is to exceed the CAPS pooled fund benchmark by one percent per annum over a rolling three-year period. This investment manager is prohibited by the trustees from investing in real estate. The trustees meet the investment managers periodically to review and discuss their investment performance. The expected rate of return on the plan’s assets is based on the plan’s asset allocation at December 31, 2004 and assumes that equity securities will outperform fixed interest bonds issued by the United Kingdom government by approximately 1.75 percent per annum.
Noble expects to contribute $1,500,000 to its international plans in 2005. Estimated benefit payments from our international plans are $720,000 for 2005, $746,000 for 2006, $900,000 for 2007, $969,000 for 2008, $1,046,000 for 2009 and $9,363,000 in the aggregate for the five years thereafter.
We presently sponsor the Noble Drilling Corporation 401(k) Savings Restoration Plan (“Restoration Plan”). The Restoration Plan is a nonqualified, unfunded employee benefit plan under which certain highly compensated employees of the Company may elect to defer compensation in excess of amounts deferrable under the Company’s 401(k) savings plan, and receive employer matching contributions (which are made in ordinary shares). The employer matching amount is limited in the same manner as are employer matching contributions under the Company’s 401(k) savings plan. Our liability for this plan was $15,591,000 and $11,750,000 at December 31, 2004 and 2003, respectively, and is included in “Accrued payroll and related costs” in the accompanying Consolidated Balance Sheets. Although not considered plan assets, a grantor trust was established from which payments for obligations under the Restoration Plan were made prior to the trust’s dissolution in December 2004. The grantor trust had a balance of $9,458,000 at December 31, 2003 and is included in “Investments in marketable securities” in the accompanying Consolidated Balance Sheet at that date. We also maintained a trust that held ordinary shares of Noble for purposes of funding our obligations under the benefit plans, including the Restoration Plan. This trust was also dissolved in December 2004. This trust held 1,700,000 ordinary shares of Noble at December 31, 2003. These shares are classified as “Treasury stock” in the accompanying Consolidated Balance Sheet at December 31, 2003.
We presently sponsor a 401(k) savings plan, a medical plan and other plans for the benefit of our employees. The cost of maintaining these plans aggregated $22,193,000, $20,220,000 and $18,167,000 in 2004, 2003 and 2002, respectively. We do not provide post-retirement benefits (other than pensions) or any post-employment benefits to our employees.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In August 2004, an indirect, wholly-owned subsidiary of Noble was served as a named defendant in two lawsuits filed in the Circuit Courts of the State of Mississippi involving numerous other companies (not affiliated with Noble) as co-defendants. In December 2004, such subsidiary was served as a named defendant in a third lawsuit filed in Mississippi Circuit Court. The lawsuits seek an unspecified amount of monetary damages on behalf of approximately 130 named individuals alleging personal injury or death, including claims under the Jones Act, purportedly resulting from exposure to asbestos on drilling rigs and associated facilities during the period 1965 through 1986. The lawsuits are in preliminary stages and we have not confirmed the number of plaintiffs, if any, that were employed by our subsidiary or otherwise associated with our drilling operations during the relevant period. We intend to defend vigorously against the litigation, and based on information currently available, we do not believe the resolution of these lawsuits will have a material adverse effect on our financial position, results of operations or cash flows.
Noble Asset Company Limited (“NACL”), a wholly-owned, indirect subsidiary of Noble, was named one of 21 parties served a Show Cause Notice issued by the Commissioner of Customs (Prev.), Mumbai, India in August 2003. The Show Cause Notice concerns alleged violations of Indian Customs laws and regulations regarding one of our jackup drilling rigs. The Commissioner alleges certain violations to have occurred before, at the time of, and after NACL acquired the rig from the rig’s previous owner. We maintain that NACL has acted in accordance with all Indian Customs laws and regulations and believe the Show Cause Notice is without merit as against NACL. In the purchase agreement for the rig, NACL received contractual indemnification against liability for Indian customs duty from the rig’s previous owner. In connection with the export of the rig from India in 2001, NACL posted a bank guarantee in the amount of $3,300,000 and a customs bond in the amount of $21,340,000, both of which remain in place. NACL filed its initial replies to the Show Cause Notice in December 2003. NACL appeared through counsel before the Commissioner in September 2004 and made oral arguments and written submissions. The Commissioner has not ruled to date. We do not believe the resolution of this matter will have a material adverse effect on our financial position, results of operations or cash flows.
We are a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to our financial position, results of operations or cash flows.
In connection with several projects, we have entered into agreements with various vendors to purchase or construct property and equipment that generally have long lead times for delivery. Any equipment purchased for a project on which we do not proceed would be used, where applicable, as capital spares for other units in our fleet. As of December 31, 2004, we had approximately $32,000,000 of outstanding purchase commitments related to these projects.
At December 31, 2004, we had certain noncancelable, long-term operating leases, principally for office space and facilities, with various expiration dates. Future minimum rentals under these leases aggregate $3,525,000 for 2005, $2,889,000 for 2006, $2,444,000 for 2007, $2,257,000 for 2008, $2,256,000 for 2009 and $6,157,000 thereafter. Rental expense for all operating leases was $4,896,000, $4,038,000 and $3,688,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
We have entered into employment agreements with each of our executive officers, as well as certain other employees. These agreements become effective upon a change of control of Noble (within the meaning set forth in the agreements) or a termination of employment in connection with or in anticipation of a change of control, and remain effective for three years thereafter. These agreements provide for compensation and certain other benefits under such circumstances.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - UNAUDITED INTERIM FINANCIAL DATA
Unaudited interim consolidated financial information for the years ended December 31, 2004 and 2003 is as follows:
(1)
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarters’ earnings per share may not agree to the total computed for the year.
NOTE 15 - PARENT GUARANTEE OF REGISTERED SECURITIES ISSUED BY SUBSIDIARY
Noble and Noble Holding are guarantors for certain debt securities issued by Noble Drilling. These debt securities include Noble Drilling’s 6.95% Senior Notes due 2009 and its 7.50% Senior Notes due 2019. The outstanding principal balances of the 6.95% Senior Notes and the 7.50% Senior Notes at December 31, 2004 were $149,954,000 and $201,695,000, respectively. Noble Drilling is an indirect, wholly-owned subsidiary of Noble and a direct, wholly-owned subsidiary of Noble Holding. Noble’s and Noble Holding’s guarantee of these securities is full and unconditional.
The following consolidating financial statements of Noble, Noble Holding, Noble Drilling and all other subsidiaries are included so that separate financial statements of Noble Drilling are not required to be filed with the United States Securities and Exchange Commission. These consolidating financial statements present Noble’s and Noble Holding’s investments in both consolidated and unconsolidated affiliates using the equity method of accounting.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts.)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2004
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2003
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2004
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2003
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2002
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2004
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2003
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND OTHER SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2002
(In thousands)
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SEGMENT AND RELATED INFORMATION
We provide diversified services for the oil and gas industry. Our reportable segments consist of the primary services we provide, which include domestic and international offshore contract drilling and engineering and consulting services. Although these segments are generally influenced by the same economic factors, each represents a distinct service to the oil and gas industry. Each of our drilling rigs is considered by us to be an operating segment within our domestic and international offshore contract drilling services reportable segments, and these operating segments are aggregated to comprise our domestic and international contract drilling services reportable segments in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information (“SFAS 131”).
Our international contract drilling services segment conducts contract drilling services in the Middle East, Mexico, the North Sea, Brazil, West Africa, India and the Mediterranean Sea. Our domestic contract drilling services segment conducts contract drilling services in the U.S. Gulf of Mexico. Our engineering and consulting services segment, as represented by our Noble Technology Services Division, provides drilling products and drilling-related software programs, well site management, project management, technical services, and operations support for our downhole technology tools.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1). All intersegment sales pricing is based on current market conditions. We evaluate the performance of our operating segments based on operating revenues and net income. Summarized financial information of our reportable segments for the years ended December 31, 2004, 2003 and 2002 is shown in the following table (in thousands). The “Other” column includes results of labor contract drilling services, other insignificant operations and corporate related items.
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
NOBLE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a reconciliation of reportable segment profit or loss to consolidated totals:
The following tables present revenues and identifiable assets by country based on the location of the service provided:
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share amounts)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Noble’s Chairman, Chief Executive Officer and President, James C. Day, and Noble’s Chief Operating Officer, Senior Vice President and Chief Financial Officer, Mark A. Jackson, have overseen and participated in an evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. On the basis of this evaluation, Mr. Day and Mr. Jackson have concluded that the Company’s disclosure controls and procedures are effective. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files with or submits to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment, the Company maintained effective internal control over financial reporting as of December 31, 2004.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this annual report on Form 10-K, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 as stated in their report which is provided in this annual report on Form 10-K.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled “Election of Directors”, “Additional Information Regarding the Board of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Member Proposals and Other Matters” appearing in our proxy statement for the annual general meeting of members to be held on April 28, 2005 (the “2005 Proxy Statement”), set forth certain information with respect to the directors of Noble and with respect to reporting under Section 16(a) of the Securities Exchange Act of 1934, and are incorporated herein by reference.
Certain information with respect to the executive officers of Noble is set forth under the caption “Executive Officers of the Registrant” in Part I of this report.
Noble has adopted a Code of Business Conduct and Ethics that applies to directors, officers and employees, including Noble’s principal executive officer, principal financial officer and principal accounting officer. Noble’s Code of Business Conduct and Ethics is posted on the Company’s website at http://www.noblecorp.com in the
“Governance” area. Changes to and waivers granted with respect to Noble’s Code of Business Conduct and Ethics related to officers identified above, and other executive officers and directors of Noble, that we are required to disclose pursuant to applicable rules and regulations of the Commission will also be posted on our website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled “Executive Compensation” appearing in the 2005 Proxy Statement sets forth certain information with respect to the compensation of our management, and, except for the report of the compensation committee of the board of directors of Noble on executive compensation and the information in such section under “Performance Graph,” is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The sections entitled “Executive Compensation - Equity Compensation Plan Information”, “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” appearing in the 2005 Proxy Statement set forth certain information with respect to securities authorized for issuance under equity compensation plans and the ownership of voting securities and equity securities of Noble, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled “Additional Information Regarding the Board of Directors - Certain Transactions” appearing in the 2005 Proxy Statement sets forth certain information with respect to certain relationships and related party transactions, and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The section entitled “Auditors” appearing in the 2005 Proxy Statement sets forth certain information with respect to accounting fees and services, and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) The following documents are filed as part of this report:
(1) A list of the financial statements filed as a part of this report is set forth in Item 8 on page 36 and is incorporated herein by reference.
(2) Financial Statement Schedules:
All schedules are omitted because they are either not applicable or required information is shown in the financial statements or notes thereto.
(3) Exhibits:
The information required by this Item 15(a)(3) is set forth in the Index to Exhibits accompanying this Annual Report on Form 10-K and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
+
Furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K.