The Daily Magic Formula Stock for 01/01/2009 is Noble Corp. According to the Magic Formula Investing Web Site, the ebit yield is 29% and the EBIT ROIC is 25-50%.
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ITEM 1. BUSINESS.
Noble Corporation, a Cayman Islands exempted company limited by shares (â€śNobleâ€ť or, together with its consolidated subsidiaries, unless the context requires otherwise, the â€śCompanyâ€ť, â€śweâ€ť, â€śourâ€ť and words of similar import) is a leading offshore drilling contractor for the oil and gas industry. We perform contract drilling services with our fleet of 62 mobile offshore drilling units located worldwide. This fleet consists of 13 semisubmersibles, three dynamically positioned drillships, 43 jackups and three submersibles. The fleet count includes two F&G JU-2000E enhanced premium jackups and three deepwater dynamically positioned semisubmersibles under construction. As previously reported, we have secured customer contracts for these jackups and semisubmersibles. For additional information on the specifications of the fleet, see â€śItem 2. Properties. â€” Drilling Fleetâ€ť. Approximately 85 percent of our fleet is currently deployed internationally, principally in the Middle East, India, Mexico, the North Sea, Brazil, and West Africa. Our other operations include labor contract drilling services and engineering and consulting services.
Noble became the successor to Noble Drilling Corporation, a Delaware corporation (which we sometimes refer to as â€śNoble Drillingâ€ť) that was organized in 1939, as part of the 2002 internal corporate restructuring of Noble Drilling and its subsidiaries. Noble and its predecessors have been engaged in the contract drilling of oil and gas wells for others in the United States since 1921 and internationally during various periods since 1939.
Our long-standing business strategy continues to be the active expansion of our worldwide offshore drilling and deepwater capabilities through acquisitions, upgrades and modifications, and the deployment of our drilling assets in important geological areas. We have also actively expanded our offshore drilling and deepwater capabilities in recent years through the construction of new rigs. In 2007 we continued execution of our active expansion strategy as indicated by the following developments and activities:
â€˘ a long-term drilling contract was signed for a fourth newbuild ultra-deepwater semisubmersible, the Noble Jim Day ;
â€˘ construction was completed and we took delivery of the newbuild ultra-deepwater semisubmersible, the Noble Clyde Boudreaux , which is now operating under a long-term contract in the U.S. Gulf of Mexico;
â€˘ construction continued on two other newbuild ultra-deepwater semisubmersibles, the Noble Dave Beard and Noble Danny Adkins , which are scheduled for delivery in the fourth quarter of 2008 and the first quarter of 2009, respectively;
â€˘ we took delivery of our newbuild F&G JU-2000E enhanced premium independent leg cantilevered jackup, the Noble Roger Lewis , which is now operating under a long-term drilling contract in Qatar; and
â€˘ construction continued on two F&G JU-2000E enhanced premium independent leg cantilevered jackups, the Noble Hans Deul and Noble Scott Marks , which are being constructed in China and are scheduled for delivery in the third quarter of 2008 and the second quarter of 2009, respectively.
Newbuild capital expenditures totaled $755 million in 2007 for our seven rigs under construction during the year.
The strategy we have followed of constructing rigs only with a customerâ€™s contractual commitment for the rig is in contrast to the approach of a number of competitors in our industry. At the end of 2007, shipyards worldwide reportedly had received commitments to construct 79 jackups and 44 deepwater floaters, including Nobleâ€™s units. The majority of these jackup units reportedly do not have a contractual commitment from a customer and are referred to in the offshore drilling industry as â€śbeing built on speculationâ€ť. Our strategy on new construction has been to expand our drilling fleet with technologically advanced units only in connection with a long-term drilling contract that covers a substantial portion of our capital investment and provides an acceptable return on our capital employed.
We have developed personnel retention programs that we believe are important to allow us to attract and retain the skilled personnel required to maintain safe and efficient operations in our competitive industry. Because hydrocarbon exploration and development activities have increased in recent years, the drilling industry has experienced significant increases in dayrates for drilling services in most markets, a tightening market for drilling equipment, and a shortage of personnel. This environment has driven operating costs higher and magnified the importance of recruiting, training and retaining skilled personnel. In recognition of the importance of our offshore operations personnel in achieving a safety record that has consistently outperformed the offshore drilling industry sector and to retain such personnel, since 2005 we have implemented three separate key operations personnel retention programs. First, in 2005 we implemented an incentive program for personnel associated with our day-to-day rig-based operations. Under this program, we distribute incentive payments based upon individual performance over the three-year period 2006-2008. Second, in 2006 we implemented a program for shore-based and engineering personnel under which participants may receive payments over the four-year period 2006-2009. Third, in 2007 we implemented a follow-on to the first program for personnel associated with our day-to-day rig-based operations. Under the 2007 program, we will make performance-based payments over the three-year period 2008-2010. We believe these programs will complement our other short- and long-term incentive programs to attract and retain the skilled personnel we need to maintain safe and efficient operations.
Our active participation in the consolidation of the offshore drilling industry continues to be an important element of our growth strategy. Consolidation typically takes one of two forms: an individual transaction for specific mobile offshore drilling units or a transaction for an entire company. In the last five years, we have added six premium jackups to our fleet through individual rig transactions. From time to time, we evaluate other individual rig transactions and business combinations with other parties, and we will continue to consider business opportunities that promote our business strategy.
BUSINESS DEVELOPMENT DURING 2007
We entered into a drilling contract with a wholly-owned subsidiary of Marathon Oil Corporation for the Noble Jim Day , a Bingo 9000 design to be completed as a dynamically positioned (DP-3) unit capable of operating in water depths up to 12,000 feet with living accommodations for 200 persons. The unitâ€™s highly efficient operational design is similar to that of the Noble Danny Adkins , currently under construction in Singapore. The Noble Jim Day , currently under construction in Singapore, is expected to operate in the U.S. Gulf of Mexico at a dayrate of $515,000 commencing in the fourth quarter of 2009.
We entered into a drilling contract with PetrĂłleos Mexicanos (â€śPemexâ€ť) for the Noble Max Smith at a dayrate of $484,000. The Noble Max Smith will be the first mobile offshore rig capable of drilling in water depths up to 7,000 feet to operate offshore Mexico. The Noble Max Smith is expected to commence operating under its Pemex contract in the third quarter of 2008 after completion of its current contract in the U.S. Gulf of Mexico and time in the shipyard for regulatory inspections and contract preparation.
In response to the effects of Hurricanes Ivan, Katrina and Rita during the 2004 and 2005 hurricane seasons, the U.S. Minerals Management Service (â€śMMSâ€ť), working together with the U.S. Coast Guard and industry, has developed and issued interim guidelines for moored drilling rig fitness requirements in the U.S. Gulf of Mexico. We worked closely with the MMS in the formulation of these guidelines, which were designed to improve performance in the area of moored rig station-keeping during the environmental loading that may be experienced during hurricanes. The interim guidelines were in effect for the 2006 and 2007 hurricane seasons. Our recently developed Noble Category 5 (NC-5 SM ) mooring standard meets the interim guidelines. We upgraded the mooring systems on the Noble Paul Romano and the Noble Jim Thompson to the NC-5 SM standard in 2007 and 2006, respectively. The mooring system on the Noble Amos Runner semisubmersible is scheduled to be upgraded in 2008.
In 2007, we continued to upgrade the capabilities of our deepwater fleet through the use of our patented aluminum alloy drilling riser (â€śAARâ€ť), which is used in place of steel risers to connect floating drilling units to equipment on the seabed. We have equipped each of the newbuild semisubmersible rigs, including the Noble Clyde Boudreaux which went into service in the second quarter of 2007, with the AAR. The AAR can be manufactured cost competitively as compared to a steel riser, but the AAR weighs significantly less (up to 40 percent less) than the typical steel riser. This significant savings in weight allows us to extend the water depth specifications of our floating drilling units with less capital investment.
We completed the planned rationalization of our technology services division in the fourth quarter of 2007 with the sale of the rotary steerable system assets and intellectual property of our Noble Downhole Technology Ltd. (â€śDownhole Technologyâ€ť) subsidiary. In the first quarter of 2007, we closed the operations of our Triton Engineering Services Inc. (â€śTritonâ€ť) subsidiary.
At January 11, 2008, our contracted backlog totaled approximately $6.7 billion with 39 of our rigs contracted for 2008 and thereafter. We anticipate that the primary terms of the current contracts on 21 of our rigs will expire at varying times in 2008. At January 11, 2008, approximately 81 percent of our available operating days were committed for 2008, approximately 40 percent for 2009 and approximately 15 percent for 2010, which percentages take into account new capacity under our newbuild rigs that we anticipate commencing operations during the 2008 through 2009 period.
We typically employ each drilling unit under an individual contract. Although the final terms of the contracts result from negotiations with our customers, many contracts are awarded based upon competitive bidding. Our drilling contracts generally contain the following terms:
â€˘ contract duration extending over a specific period of time or a period necessary to drill one or more wells;
â€˘ provisions permitting early termination of the contract by the customer (i) if the unit is lost or destroyed or (ii) if operations are suspended for a specified period of time due to either breakdown of major equipment or â€śforce majeureâ€ť events beyond our control and the control of the customer;
â€˘ options in favor of the customer to extend the contract term, generally upon advance notice to us and usually (but not always) at mutually agreed upon rates;
â€˘ payment of compensation to us (generally in U.S. Dollars although some customers, typically national oil companies, require a part of the compensation to be paid in local currency) on a â€śdayworkâ€ť basis, so that we receive a fixed amount for each day (â€śdayrateâ€ť) that the drilling unit is operating under contract (a lower rate or no compensation is payable during periods of equipment breakdown and repair or adverse weather or in the event operations are interrupted by other conditions, some of which may be beyond our control);
â€˘ payment by us of the operating expenses of the drilling unit, including labor costs and the cost of incidental supplies; and
â€˘ provisions that allow us to recover certain cost increases from our customers (in contracts for approximately 67 percent of our rigs).
The terms of some of our drilling contracts permit early termination of the contract by the customer, without cause, generally exercisable upon advance notice to us and in some cases upon the making of an early termination payment to us. Certain of our drilling contracts with Pemex in Mexico, for example, contain provisions that allow early cancellation on 30 days or less notice to us without Pemex making an early termination payment.
During times of depressed market conditions, our customers may seek to avoid or reduce their obligations to us under term drilling contracts or letter agreements or letters of intent for drilling contracts. A customer may no longer need a rig, due to a reduction in its exploration, development or production program, or it may seek to obtain a comparable rig at a lower dayrate.
Generally, our contracts allow us to recover our mobilization and demobilization costs associated with moving a drilling unit from one regional location to another. When market conditions require us to bear these costs, our operating margins are reduced accordingly. We cannot predict our ability to recover these costs in the future. For shorter moves such as â€śfield movesâ€ť, our customers have generally agreed to bear the costs of moving the unit by paying us a reduced dayrate or â€śmove rateâ€ť while the unit is being moved.
OFFSHORE DRILLING OPERATIONS
Contract Drilling Services
We conduct offshore contract drilling operations, which accounted for approximately 93 percent, 93 percent and 90 percent of operating revenues for the years ended December 31, 2007, 2006 and 2005, respectively. We conduct our contract drilling operations principally in the Middle East, India, U.S. Gulf of Mexico, Mexico, the North Sea, Brazil, and West Africa. In 2007, Pemex accounted for approximately 15 percent of our total operating revenues. No other single customer accounted for more than 10 percent of our total operating revenues in 2007.
Our contract drilling services revenues from international sources accounted for approximately 76 percent, 72 percent and 77 percent of total contract drilling services revenues for 2007, 2006 and 2005, respectively.
Our contract drilling services revenues generated in the U.S. accounted for approximately 24 percent, 28 percent and 23 percent of our total contract drilling services revenues for 2007, 2006 and 2005, respectively.
We perform services under labor contracts for drilling and workover activities covering 11 rigs operating in the United Kingdom sector of the North Sea and two rigs under a labor contract (the â€śHibernia Contractâ€ť) off the east coast of Canada. We do not own or lease these rigs.
Under our labor contracts, we provide the personnel necessary to manage and perform the drilling operations from drilling platforms owned by the operator. With the exception of the Hibernia Contract, which is operating under a recently renewed five-year agreement that extends through January 2013, our labor contracts are generally renewable on an annual basis.
In January 2008, we reached agreement to sell our North Sea labor contract drilling services business to Seawell Holding UK Limited (â€śSeawellâ€ť) for $35 million. The sale to Seawell includes labor contracts covering 11 platform operations in the United Kingdom sector of the North Sea. These operations employ approximately 450 people and generated $96.2 million of revenue in 2007. The Hibernia Contract is not included in this sale. Closing is subject to regulatory approval and other customary closing conditions and is expected to occur on or about March 31, 2008.
Additionally, we operate the Noble Kolskaya through a bareboat charter that expires by its terms in July 2008. Under the bareboat charter, we receive a 30 percent effective net profit interest in the Noble Kolskaya operations.
The offshore contract drilling industry is a highly competitive and cyclical business characterized by high capital and maintenance costs. Some of our competitors may have access to greater financial resources than we do.
In the provision of contract drilling services, competition involves numerous factors, including price, rig availability and suitability, experience of the workforce, efficiency, safety performance record, condition of equipment, operating integrity, reputation, industry standing and client relations. We believe that we compete favorably with respect to all of these factors. We follow a policy of keeping our equipment well maintained and technologically competitive. However, our equipment could be made obsolete by the development of new techniques and equipment.
We compete on a worldwide basis, but competition may vary significantly by region at any particular time. Demand for offshore drilling equipment also depends on the exploration and development programs of oil and gas producers, which in turn are influenced by the financial condition of such producers, by general economic conditions and prices of oil and gas, and by political considerations and policies. In addition, industry-wide shortages of supplies, services, skilled personnel and equipment necessary to conduct our business can occur. We cannot assure that any such shortages experienced in the past would not happen again or that any shortages, to the extent currently existing, will not continue or worsen in the future.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Political developments and numerous governmental regulations, which may relate directly or indirectly to the contract drilling industry, affect many aspects of our operations. The regulations applicable to our operations include provisions that regulate the discharge of materials into the environment or require remediation of contamination under certain circumstances.
The U.S. Oil Pollution Act of 1990 (â€śOPA 90â€ť) and regulations thereunder impose certain additional operational requirements on our offshore rigs operating in the U.S. Gulf of Mexico and govern liability for leaks, spills and blowouts involving pollutants. Regulations under OPA 90 require owners and operators of rigs in United States waters to maintain certain levels of financial responsibility. We have made and will continue to make expenditures to comply with environmental requirements. To date we have not expended material amounts in order to comply, and we do not believe that our compliance with such requirements will have a material adverse effect upon our results of operations or competitive position or materially increase our capital expenditures. Although these requirements impact the energy and energy services industries, generally they do not appear to affect us any differently or to any greater or lesser extent than other companies in the energy services industry.
At December 31, 2007, we employed approximately 6,600 persons, including persons engaged through labor contractors or agencies. Of the 6,600 persons, approximately 79 percent were engaged in international operations and approximately 21 percent were engaged in U.S. operations. We are not a party to any collective bargaining agreements that are material, and we consider our employee relations to be satisfactory.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
Information regarding our revenues from external customers, segment profit or loss and total assets attributable to each segment for the last three fiscal years is presented in Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.
Information regarding our operating revenues and identifiable assets attributable to each of our geographic areas of operations for the last three fiscal years is presented in Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934 are available free of charge at our internet website at http://www.noblecorp.com. These filings are also available to the public at the U.S. Securities and Exchange Commissionâ€™s (â€śSECâ€ť) Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Electronic filings with the SEC are also available on the SEC internet website at http://www.sec.gov.
Lawrence J. Chazen,
age 67, director since 1994
Mr. Chazen has served since 1977 as Chief Executive Officer of Lawrence J. Chazen, Inc., a California registered investment adviser engaged in providing financial advisory services.
Mary P. Ricciardello,
age 52, director since 2003
Ms. Ricciardello served as Senior Vice President and Chief Accounting Officer of Reliant Energy, Inc. from January 2001 to August 2002, and immediately prior to that served as its Senior Vice President and Comptroller from September 1999 to January 2001 and as its Vice President and Comptroller from 1996 to September 1999. Ms. Ricciardello also served as Senior Vice President and Chief Accounting Officer of Reliant Resources, Inc. from May 2001 to August 2002. Reliant principally provides electricity and energy services to retail and wholesale customers. Ms. Ricciardelloâ€™s current principal occupation is as a certified public accountant, and she has not held a principal employment since leaving her positions with Reliant Energy, Inc. and Reliant Resources, Inc. in August 2002. Ms. Ricciardello is also a director of U.S. Concrete, Inc. and Devon Energy Corporation.
MANAGEMENT DISCUSSION FROM LATEST 10K
ITEM 7. MANAGEMENTâ€™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is intended to assist you in understanding our financial position at December 31, 2007 and 2006, and our results of operations for each of the years in the three-year period ended December 31, 2007. You should read the accompanying consolidated financial statements and related notes in conjunction with this discussion.
Effective in the fourth quarter of 2007, we report our international and domestic contract drilling operations as a single reportable segment: Contract Drilling Services. The consolidation into one reportable segment was attributable to how we manage our business, and the fact that all of our drilling fleet is dependent upon the worldwide oil industry. The mobile offshore drilling units comprising our offshore rig fleet operate in a single, global market for contract drilling services and are often redeployed globally due to changing demands and needs of our customers, which consist largely of major international and government owned/controlled oil and gas companies throughout the world. The â€śOtherâ€ť category in our segment based discussions includes the results of labor contract drilling services, engineering and consulting services, other insignificant operations and corporate related items. Effective January 1, 2007, our 30 percent effective net profit interest in the Noble Kolskaya , which is operated through a bareboat charter that expires by its terms in July 2008, is reported in Labor contract drilling services in our Consolidated Statements of Income and in the â€śOtherâ€ť results column for segment reporting. Beginning January 1, 2007, general corporate interest expense was no longer allocated to segments. All prior year information has been reclassified to conform to the current year presentation of segments. See Note 15 of our Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Our 2007 financial and operating results include:
â€˘ operating revenues totaling $3 billion;
â€˘ net income of $1.2 billion or $4.48 per diluted share;
â€˘ net cash provided by operating activities totaling $1.4 billion;
â€˘ an increase in our average dayrate across our worldwide fleet to $139,948 from $97,837 in 2006;
â€˘ taking delivery of the ultra-deepwater semisubmersible, the Noble Clyde Boudreaux , and the enhanced premium jackup, the Noble Roger Lewis ;
â€˘ announcement of a long-term contract for a fourth newbuild ultra-deepwater semisubmersible, the Noble Jim Day ;
â€˘ a two-for-one stock split in the form of a 100 percent stock dividend, with the payment of a quarterly cash dividend thereafter in an amount that effectively doubled our cash dividend paid for the quarter preceding the stock split; and
â€˘ a decrease in debt to 15 percent of total capitalization at the end of 2007, down from 18 percent at the end of 2006.
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, higher oil and natural gas prices or our customersâ€™ expectations of higher prices result in a greater demand for our services. These prices are extremely volatile. The average Brent oil price was $72.47 per barrel during 2007, or 11 percent higher than the average Brent oil price of $65.15 per barrel during 2006, following a 20 percent increase over 2005. The average Brent oil price moderated in the first half of 2007 before increasing significantly to an average of $88.56 in the fourth quarter of 2007. The continuation of strong oil prices in 2007 supported increases in drilling activity in oil markets worldwide.
U.S. natural gas prices reached a 20-year high in 2005, averaging $8.81 per thousand cubic feet (average Henry Hub monthly spot price). Natural gas prices moderated during 2007 and 2006, averaging $6.98 and $6.74 per thousand cubic feet, respectively. We do not have significant exposure to the U.S. natural gas markets because we have only three mobile offshore drilling units (two contracted submersibles and one cold stacked submersible) currently deployed in the shallow waters of the U.S. Gulf of Mexico. However, the moderation of natural gas prices during 2007 and 2006 has caused some competitors to move jackup rigs from the U.S. Gulf of Mexico market to various international markets and these actions may increase competition within those markets.
At January 11, 2008, approximately 81 percent of our operating days were committed under contract for 2008, approximately 40 percent for 2009 and approximately 15 percent for 2010, which percentages take into account new capacity under our newbuild rigs that we anticipate commencing operations during the 2008 through 2009 period. We continue to face significant cost pressure as a result of increases in labor costs and prices for materials and services that are essential to our operations. Daily operating costs increased to $45,375 per day in 2007 from $36,100 per day in 2006. Given the current high demand for personnel and equipment, we expect to see continued pressure on operating costs in 2008.
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 would have an adverse effect on our results of operations.
Our long-standing business strategy continues to be the active expansion of our worldwide offshore drilling and deepwater capabilities through acquisitions, upgrades and modifications, and the deployment of our drilling assets in important geological areas. Since the beginning of 2001 we have added seven jackups, two deepwater semisubmersibles, and two ultra-deepwater semisubmersible baredeck hulls to our worldwide fleet through acquisitions. We have also actively expanded our offshore drilling and deepwater capabilities in recent years through the construction of new rigs. In 2007 we continued execution of our active expansion strategy as indicated by the following developments and activities:
â€˘ we signed a long-term drilling contract for a fourth newbuild ultra-deepwater semisubmersible, the Noble Jim Day ;
â€˘ we took delivery of the newbuild ultra-deepwater semisubmersible, the Noble Clyde Boudreaux , which is now operating under a long-term contract in the U.S. Gulf of Mexico;
â€˘ construction continued on two other newbuild ultra-deepwater semisubmersibles, the Noble Dave Beard and Noble Danny Adkins , which are scheduled for delivery in the fourth quarter of 2008 and the first quarter of 2009, respectively;
â€˘ construction was completed and we took delivery of our newbuild F&G JU-2000E enhanced premium independent leg cantilevered jackup, the Noble Roger Lewis , which is now operating under a long-term drilling contract in Qatar; and
â€˘ construction continued on two F&G JU-2000E enhanced premium independent leg cantilevered jackups, the Noble Hans Deul and Noble Scott Marks , which are being constructed in China and are scheduled for delivery in the third quarter of 2008 and the second quarter of 2009, respectively.
Newbuild capital expenditures totaled $755 million in 2007 for our seven rigs under construction during the year.
In June 2007, we announced that we were conducting an internal investigation of our Nigerian operations, focusing on the legality under the FCPA and local laws of our Nigerian affiliateâ€™s reimbursement of certain expenses incurred by our customs agents in connection with obtaining and renewing permits for the temporary importation of drilling units and related equipment into Nigerian waters, including permits that are necessary for our drilling units to operate in Nigerian waters. We also announced that the audit committee of Nobleâ€™s board of directors had engaged a leading law firm with significant experience in investigating and advising on FCPA matters to lead the investigation as independent outside counsel. The scope of the investigation also includes our dealings with customs agents and customs authorities in certain parts of the world other than Nigeria in which we conduct our operations, as well as dealings with other types of local agents in Nigeria and these other parts of the world. There can be no assurance that evidence of additional potential FCPA violations may not be uncovered through the investigation.
The audit committee commissioned the internal investigation after our management brought to the attention of the audit committee a news release issued by another company that disclosed that the other company was conducting an internal investigation into the FCPA implications of certain actions by a customs agent in Nigeria in connection with the temporary importation of that companyâ€™s vessels into Nigeria. Our drilling units that conduct operations in Nigeria do so under temporary import permits, and management considered it prudent to review our own practices in this regard. We voluntarily contacted the SEC and the U.S. Department of Justice (â€śDOJâ€ť) to advise them that an independent investigation was under way. We have been cooperating, and intend to continue to cooperate, fully with both agencies. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs, any of which could have a material adverse effect on our business or financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business, to attract and retain employees, and to access capital markets. Further, detecting, investigating, and resolving such actions is expensive and consumes significant time and attention of our senior management.
The internal investigation is ongoing, and we cannot predict whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or if a proceeding is opened, what potential remedies these agencies may seek. We could also face fines or sanctions in relevant foreign jurisdictions. Based on information obtained to date in our internal investigation, we have not determined that any potential liability that may result is either probable or can be reasonably estimated. As a result, we have not made any accrual in our financial statements at December 31, 2007.
We previously disclosed that, due to the ongoing internal investigation, we had not been able to obtain or renew temporary import permits for our seven drilling units operating offshore Nigeria, although Nigerian customs authorities had informed us that our applications for permits for our drilling units would be approved. Currently, six of the seven drilling units are operating offshore Nigeria, and the seventh drilling unit is undergoing modifications and regulatory inspections outside of Nigeria. We have now received temporary import permit extension documentation from the Nigerian Customs Service and have been engaged in causing bank bonds to be issued, and delivered to and accepted by, the Nigerian Customs Service as is required by the extension documentation in order to cause the permit extensions to become effective. We have completed this bonding process for five of the six units still operating offshore Nigeria. The administrative process at the Nigerian Customs Service is not yet completed for the sixth unit, but we expect this process to be completed shortly. The term of each extended permit is through May 27, 2008. Since the seventh unit is no longer in Nigerian waters, we would need to obtain a new temporary import permit for the unit upon any return of the unit to Nigeria following completion of its modifications and regulatory inspections. Our management continues to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions necessary to continue operations with our drilling units in Nigeria after expiration of the term of the permit extensions. If we cannot obtain a new permit or a further extension necessary to continue operations of any unit, we may need to terminate the drilling contract of such unit and relocate such unit from Nigerian waters. We cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.
Notwithstanding that the internal investigation is ongoing, we have concluded that certain changes to our FCPA compliance program would provide us greater assurance that our assets are not used, directly or indirectly, to make improper payments, including customs payments, and that we are in compliance with the FCPAâ€™s record-keeping requirements. Although we have had a long-time published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by us to government officials, we have since the commencement of the internal investigation adopted, and may adopt additional, intermediate measures intended to enhance FCPA compliance procedures. Additional measures may be required once the investigation concludes. RESULTS OF OPERATIONS
2007 Compared to 2006
Net income for 2007 was $1.2 billion, or $4.48 per diluted share, on operating revenues of $3.0 billion, compared to net income for 2006 of $731.9 million, or $2.66 per diluted share, on operating revenues of $2.1 billion.
The following table sets forth operating revenues and operating costs and expenses for our reportable segment for the periods indicated (for additional information regarding our reportable segment, see Note 15 of the accompanying consolidated financial statements):
Operating Revenues. Contract drilling services revenues increased $827.3 million, or 44 percent, primarily due to higher average dayrates. Higher average dayrates increased revenues approximately $812.2 million and the higher number of operating days increased revenues approximately $15.1 million. Average dayrates increased from $97,837 to $139,948, or $42,111 (43 percent), in 2007 as compared to 2006. Higher average dayrates were received across all rig categories as strong demand for drilling rigs drove dayrates higher. Operating days increased from 19,287 in 2006 to 19,395 in 2007, or 108 days. Two newbuilds, the ultra-deepwater semisubmersible Noble Clyde Boudreaux and the enhanced premium jackup Noble Roger Lewis , which were added to the fleet in June and September 2007, respectively, contributed 307 additional operating days in 2007. These additional operating days were partially offset by 86 fewer operating days on our submersible the Noble Fri Rodli , which was stacked in October 2007, due to weakening demand in the shallow waters of the U.S. Gulf of Mexico and 49 fewer operating days on our drillship the Noble Roger Eason , principally due to a fire incident in late November 2007. Additionally, in 2007, there were 49 more unpaid shipyard and regulatory inspection days than in 2006. Utilization of our contract drilling fleet decreased to 95 percent for 2007 from 96 percent in 2006. Operating Costs and Expenses. Contract drilling services expenses increased $183.8 million, or 26 percent, in 2007 as compared to 2006. The Noble Clyde Boudreaux and the Noble Roger Lewis , two newbuild rigs which began operations in 2007, added $22.9 million of operating costs in 2007. Additionally, we incurred start-up costs on our newbuild rigs under construction in advance of their completion as rig personnel were added and other costs were incurred. Newbuild rig start-up costs incurred in 2007 were $10.8 million, or $10.1 million higher than start-up costs incurred in 2006. Excluding the effect of our newbuild rigs, our labor costs increased $63.5 million due to higher compensation, including retention programs designed to retain key rig and operations personnel. Repair and maintenance costs during 2007 increased $26.6 million as rig equipment and oilfield labor service costs continued to increase. Higher agency fees of $14.0 million were incurred in 2007 in those countries where we retain agents who are compensated based on a percentage of revenues. Higher safety and training costs of $8.5 million were incurred in 2007 due to increased new hire personnel. In 2007, we also incurred a $7.8 million increase in the costs of rotating our rig crews due to more rigs operating internationally and experienced a $6.1 million increase in offshore drilling crew personal injury claims. A $10 million charge, which equals our insurance deductible in 2007, was recorded related to a fire incident onboard the Noble Roger Eason in November 2007.
Depreciation and amortization increased $34.4 million, or 14 percent, to $283.2 million in 2007 due to $14.2 million of additional depreciation on the Noble Clyde Boudreaux , which began operations in June 2007, and $20.2 million of additional depreciation related to other capital expenditures on our fleet.
Hurricane Losses and Recoveries. Certain of our rigs operating in the U.S. Gulf of Mexico sustained damage in 2005 as a result of Hurricanes Katrina and Rita. All such units had returned to work by April 2006.
During the fourth quarter of 2007, we recognized a net recovery of $5.1 million on the final settlement of all remaining physical damage and loss of hire insurance claims for damage caused by Hurricanes Katrina and Rita in 2005. This settlement was partially offset by an additional claim loss of $1.6 million earlier in 2007, the net effect of which is reflected in Hurricane losses and recoveries, net as a component of Operating Costs and Expenses in our Consolidated Statements of Income. During 2006, we recorded $10.7 million in loss of hire insurance proceeds for two of our units that suffered downtime attributable to the hurricanes. Our insurance receivables at December 31, 2007 related to claims for hurricane damage were $39.1 million. We anticipate receiving $39.1 million during the first quarter of 2008 as final settlement of all remaining hurricane-related claims and receivables for physical damage and loss of hire. Engineering, consulting and other operating revenues decreased $6.3 million primarily due to the sale of the software business of our Maurer Technology Inc. (â€śMaurerâ€ť) subsidiary in June 2006, and the closure of our Triton subsidiary in March 2007. Subsequent to such sale and closure, the engineering, consulting and other operating revenues were primarily derived from the rotary steerable system assets and intellectual property owned by Downhole Technology, which were sold in November 2007.
Operating Costs and Expenses . Operating costs and expenses for labor contract drilling services increased $34.3 million over 2006 due to higher labor costs in Canada and the North Sea and additional operating days in the North Sea, which added $17.2 million in additional costs, and $17.1 million higher bareboat charter and other operating costs on the Noble Kolskaya . The increased operating activity in the North Sea also generated $12.6 million in additional reimbursables expense in 2007.
Engineering, consulting and other expenses increased $0.7 million in 2007. In March 2007, the operations of our Triton subsidiary were closed resulting in closure costs of $1.9 million, including a $0.4 million impairment of goodwill. In November 2007, Downhole Technology sold its rotary steerable system assets and intellectual property resulting in a loss of $12.9 million for the sale of these assets and intellectual property and other related exit activities, including a $9.4 million impairment of goodwill. In June 2006, the software business of Maurer was sold resulting in a loss of $3.8 million, including the write-off of goodwill totaling $4.8 million. Excluding the above charges related to Triton, Downhole Technology and Maurer, costs and expenses declined $10.3 million due to the disposal of these businesses and the reduction in project levels.
Depreciation and amortization increased $5.2 million in 2007 as compared to 2006 primarily due to $4.1 million higher depreciation on the Noble Kolskaya . The Noble Kolskaya bareboat charter agreement expires in July 2008, and contract specific capital expenditures related to its operations are depreciated over the remaining term of the bareboat charter.
Selling, General and Administrative Expenses . Consolidated selling, general and administrative expenses increased $39.5 million to $85.8 million in 2007 from $46.3 million in 2006. The increase is principally due to $14.9 million of costs incurred in the internal investigation of our Nigerian operations, $6.7 million related to the retirement and resignation of our former chief executive officers, $6.7 million in higher employee-related costs for our employee benefit and retention plans and the addition of personnel, and approximately $5.7 million higher professional services fees including internal audit, tax and information technology services.
Interest Expense . Interest expense, net of amount capitalized, decreased $3.1 million in 2007. During 2007, we incurred interest expense of $7.7 million related to the debt incurred in connection with a short-term loan agreement (see â€śâ€”Liquidity and Capital Resources â€” Credit Facilities and Long-Term Debtâ€ť). This compares with interest expense of approximately $8.2 million related to debt incurred in connection with our former investment in Smedvig ASA (â€śSmedvigâ€ť) during 2006. Excluding interest expense related to these debt balances, interest expense increased $10.0 million in 2007 primarily due to a higher level of borrowings in 2007 under our unsecured revolving bank credit facility and a full year of interest expense on our 5.875% Senior Notes issued in May 2006. Interest capitalized in 2007 increased $12.5 million from $37.9 million in 2006 to $50.4 million in 2007. The increase in interest incurred and interest capitalized is primarily attributable to our newbuild construction.
Other, net. Other, net increased $1.1 million in 2007. Interest income increased $3.9 million as a result of higher levels of cash investments in 2007, in part due to the investment of the proceeds of the borrowing under a short-term loan agreement with Goldman Sachs Credit Partners L.P., which contributed $6.3 million of interest income in 2007. In addition, 2006 included income of $4.4 million from the interests in deepwater oil and gas properties received pursuant to a prior year litigation settlement, $1.8 million of gains on sale of drill pipe and a $3.5 million charge for the settlement and release of claims by one of our agents for commissions relating to certain of our Middle East division activities.
Income Tax Provision . The income tax provision increased $93.5 million primarily due to higher pre-tax earnings in 2007, increasing income tax expense by $116.7 million, offset by a decrease in the effective tax rate from 20.6 percent in 2006 to 19.0 percent in 2007 decreasing income tax expense by $23.2 million. The lower effective tax rate resulted primarily from higher pre-tax earnings of non-U.S. owned assets, which generally have a lower statutory tax rate, and lower pre-tax earnings of U.S. owned assets.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
MANAGEMENTâ€™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our financial position at September 30, 2008, and our results of operations for the three and nine months ended September 30, 2008 and 2007. The following discussion should be read in conjunction with the consolidated financial statements and related notes contained in this report on Form 10-Q and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Beginning in the fourth quarter of 2007, we report our international and domestic contract drilling operations as a single reportable segment: Contract Drilling Services. The consolidation into one reportable segment reflects how we manage our business, and the fact that all of our drilling fleet is dependent upon the worldwide oil industry. The mobile offshore drilling units comprising our offshore rig fleet operate in a single, global market for contract drilling services and are often redeployed globally due to changing demands of our customers, which consist largely of major international and government owned/controlled oil and gas companies throughout the world. The â€śOtherâ€ť category in our segment-based discussions includes the results of labor contract drilling services, engineering and consulting services, other insignificant operations and corporate related items. All prior year information has been reclassified to conform to the current year presentation of segments. See Note 11 of our Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
This report on Form 10-Q includes â€śforward-looking statementsâ€ť within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, backlog, plans and objectives of management for future operations, foreign currency requirements, industry conditions, and indebtedness covenant compliance are forward-looking statements. When used in this report, the words â€śanticipate,â€ť â€śbelieve,â€ť â€śestimate,â€ť â€śexpect,â€ť â€śintend,â€ť â€śmay,â€ť â€śplan,â€ť â€śproject,â€ť â€śshouldâ€ť and similar expressions are intended to be among the statements that identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. These forward-looking statements speak only as of the date of this report on Form 10-Q and we undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law. We have identified factors that could cause actual plans or results to differ materially from those included in any forward-looking statements. These factors include those referenced or described in â€śItem 1A. Risk Factorsâ€ť of Part II included herein, and in our other filings with the U.S. Securities and Exchange Commission (â€śSECâ€ť). We cannot control such risk factors and other uncertainties, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. You should consider these risks and uncertainties when you are evaluating us.
We are a leading offshore drilling contractor for the oil and gas industry. We perform contract drilling services with our fleet of 63 offshore drilling units located worldwide, including the Middle East, India, the U.S. Gulf of Mexico, Mexico, the North Sea, Brazil, and West Africa. Our fleet count includes five rigs currently under construction.
The global financial crisis created an environment of uncertainty during the third quarter of 2008 that has continued in the fourth quarter of 2008, and it has raised concerns that the worldwide economy may enter into a prolonged recessionary period. Deterioration in the worldwide economy could result in reduced demand for crude oil and natural gas, exploration and production activity and demand for offshore drilling services. The financial crisis has created significant reductions in available capital and liquidity from banks and other providers of credit, which may limit our access to capital used to fund operations and capital expenditures in the future and may adversely affect our customersâ€™ and lendersâ€™ ability to fulfill their obligations to us. Other possible negative impacts include a decline in dayrates for new contracts and a slowing in the pace of new contract activity. Demand for our drilling services generally depends on a variety of economic and political factors, including worldwide demand for oil and gas, the ability of the Organization of Petroleum Exporting Countries (â€śOPECâ€ť) to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of various governments regarding exploration and development of their oil and gas reserves. Demand for our services is also a function of the worldwide supply of mobile offshore drilling units. Industry sources report that 19 newbuild jackup rigs and five new deepwater newbuilds entered service during the first nine months of 2008, and a total of 52 newbuild jackups and 35 deepwater newbuilds are reportedly scheduled to enter service worldwide during the remainder of 2008 and 2009. Many of these rigs are being built by market speculators, and while a majority of the deepwater rigs have secured commitments, more than half of the newbuild jackups are currently not contracted. The introduction of non-contracted rigs into the marketplace could have an adverse affect on the level of demand for our services or the dayrates we are able to achieve.
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, higher oil and natural gas prices or our customersâ€™ expectations of higher prices result in a greater demand for our services. These prices are extremely volatile.
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 or increases in the supply of drilling rigs into the market could have an adverse effect on our results of operations.
Results and Strategy
In the third quarter of 2008, we recognized net income of $383 million, or $1.43 per diluted share, on total revenues of $862 million. The average dayrate across our worldwide fleet increased to $177,683 from $167,002 in the second quarter of 2008. Fleetwide average utilization was 90 percent in the third quarter of 2008 and 90 percent in the prior quarter. Daily contract drilling services costs decreased to $53,979 for the third quarter of 2008 from $54,674 for the second quarter. As a result, our contract drilling services margin increased to 70 percent from 67 percent in the second quarter of 2008.
Our long-standing business strategy continues to be the active expansion of our worldwide offshore drilling and deepwater capabilities through acquisitions, upgrades and modifications, and the deployment of our drilling assets in important geological areas. We have also actively expanded our offshore drilling and deepwater capabilities in recent years through the construction of new rigs. During the third quarter of 2008, we continued our active expansion strategy as indicated by the following activities:
we continued construction on three newbuild ultra-deepwater semisubmersibles, the Noble Dave Beard , Noble Danny Adkins and Noble Jim Day , which are scheduled for delivery in the first quarter of 2009, the second quarter of 2009 and the fourth quarter of 2009, respectively;
we completed construction and took delivery of the F&G JU-200E enhanced premium independent leg cantilevered jackup, the Noble Hans Deul;
we continued construction on the F&G JU-2000E enhanced premium independent leg cantilevered jackup, Noble Scott Marks , which is scheduled for delivery in the second quarter of 2009; and
we entered into agreements for the construction of a new, dynamically positioned, ultra-deepwater, harsh environment Globetrotter -class drillship capable of working in up to 10,000 feet of water, which is scheduled to be delivered in the second half of 2011.
Newbuild capital expenditures during the three and nine months ended September 30, 2008 totaled $252 million and $563 million, respectively.
CONTRACT DRILLING SERVICES BACKLOG
We maintain a backlog (as defined below) of commitments for contract drilling services. The following table sets forth as of September 30, 2008 the amount of our contract drilling services backlog and the percent of available operating days committed for the periods indicated:
Represents a three-month period beginning October 1, 2008.
Our drilling contracts with Petroleo Brasileiro S.A. (â€śPetrobrasâ€ť) provide an opportunity for us to earn performance bonuses based on absence of downtime experienced for our rigs operating offshore Brazil. With respect to our semisubmersibles operating offshore Brazil, we have included in our backlog an amount equal to 75 percent of potential performance bonuses for such semisubmersibles, which amount is based on and consistent with our historical earnings of performance bonuses for these rigs. With respect to our drillships operating offshore Brazil, we (a) have not included in our backlog amounts any performance bonuses for periods prior to the commencement of certain upgrade projects planned for 2010 and 2011, which projects are designed to enhance the reliability and operational performance of our drillships, and (b) have included in our backlog amounts an amount equal to 75 percent of potential performance bonuses for periods after the estimated completion of such upgrade projects. Our backlog amount for semisubmersibles/drillshi ps includes approximately $346 million attributable to these performance bonuses.
Our drilling contracts with Pemex Exploracion y Produccion (â€śPemexâ€ť) for certain jackups operating offshore in Mexico are subject to price review and adjustment of the rig dayrate. Presently, contracts for five jackups have dayrates indexed to the world average of the highest dayrates published by ODS-Petrodata. After an initial firm dayrate period, the dayrates are generally adjusted quarterly based on formulas calculated from the index. Our contract drilling services backlog has been calculated using the September 30, 2008 index-based dayrates for periods subsequent to the initial firm dayrate period.
Pemex has the ability to cancel early its drilling contracts with us on 30 days or less notice without Pemex making an early termination payment. We currently have 12 rigs contracted to Pemex in Mexico, and our backlog includes approximately $1.6 billion related to such contracts at September 30, 2008.
Percentages take into account additional capacity from the estimated dates of deployment of our newbuild rigs that are scheduled to commence operations during the balance of 2008 and 2009.
Our contract drilling services backlog consists of commitments we believe to be firm. Our contract drilling services backlog reported above reflects estimated future revenues attributable to both signed drilling contracts and letters of intent. A letter of intent is generally subject to customary conditions, including the execution of a definitive drilling contract. If worldwide economic conditions continue to deteriorate, it is possible that some customers that have entered into letters of intent will not enter into signed drilling contracts. We calculate backlog for any given unit and period by multiplying the full contractual operating dayrate for such unit by the number of days remaining in the period. The reported contract drilling services backlog does not include amounts representing revenues for mobilization, demobilization and contract preparation, which are not expected to be significant to our contract drilling services revenues, amounts constituting reimbursables from customers or amounts attributable to uncommitted option periods under drilling contracts or letters of intent.
The amount of actual revenues earned and the actual periods during which revenues are earned may be different than the backlog amounts and backlog periods set forth in the table above due to various factors, including, but not limited to, shipyard and maintenance projects, unplanned downtime, weather conditions and other factors that result in applicable dayrates lower than the full contractual operating dayrate. In addition, amounts included in the backlog may change because drilling contracts may be varied or modified by mutual consent or customers may exercise early termination rights contained in some of our drilling contracts or decline to enter into a drilling contract after executing a letter of intent. As a result, our backlog as of any particular date may not be indicative of our actual operating results for the subsequent periods for which the backlog is calculated.
In June 2007, we announced that we were conducting an internal investigation of our Nigerian operations, focusing on the legality under the U.S. Foreign Corrupt Practices Act of 1977, as amended (the â€śFCPAâ€ť), and local laws of our Nigerian affiliateâ€™s reimbursement of certain expenses incurred by our customs agents in connection with obtaining and renewing permits for the temporary importation of drilling units and related equipment into Nigerian waters, including permits that are necessary for our drilling units to operate in Nigerian waters. We also announced that the audit committee of Nobleâ€™s Board of Directors had engaged a leading law firm with significant experience in investigating and advising on FCPA matters to lead the investigation as independent outside counsel. The scope of the investigation also includes our dealings with customs agents and customs authorities in certain parts of the world other than Nigeria in which we conduct our operations, as well as dealings with other types of local agents in Nigeria and such other parts of the world. There can be no assurance that evidence of additional potential FCPA violations may not be uncovered through the investigation.
The audit committee commissioned the internal investigation after our management brought to the attention of the audit committee a news release issued by another company. The news release disclosed the other company was conducting an internal investigation into the FCPA implications of certain actions by a customs agent in Nigeria in connection with the temporary importation of that companyâ€™s vessels into Nigeria. Our drilling units that conduct operations in Nigeria do so under temporary import permits, and management considered it prudent to review our own practices in this regard.
We voluntarily contacted the SEC and the U.S. Department of Justice (â€śDOJâ€ť) to advise them that an independent investigation was underway. We have been cooperating, and intend to continue to cooperate, fully with both agencies. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs, any of which could have a material adverse effect on our business or financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business, to attract and retain employees, and to access capital markets. Further, detecting, investigating, and resolving such actions is expensive and consumes significant time and attention of our senior management.
The independent outside counsel appointed by the audit committee to perform the internal investigation recently made a presentation of the results of its investigation to the DOJ and the SEC. The SEC and the DOJ have begun to review these results and information gathered by the independent outside counsel in the course of the investigation. Neither the SEC nor the DOJ has indicated what action it may take, if any, against us or any individual, or whether it may request that the audit committeeâ€™s independent outside counsel conduct further investigation. Therefore, we consider the internal investigation to be ongoing and cannot predict when it will conclude. Furthermore, we cannot predict whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or if a proceeding is opened, what potential remedies these agencies may seek. We could also face fines or sanctions in relevant foreign jurisdictions. Based on information obtained to date in our internal investigation, we have not determined that any potential liability that may result is probable or remote or can be reasonably estimated. As a result, we have not made any accrual in our consolidated financial statements at September 30, 2008.
We are currently operating four jackup rigs offshore Nigeria under extensions of temporary import permits that allow the rigs to remain in Nigeria through November 28, 2008. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria after expiration of the current terms of the temporary import permits. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. We cannot predict what impact this may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.
Notwithstanding that the internal investigation is ongoing, we have concluded that certain changes to our FCPA compliance program would provide us greater assurance that our assets are not used, directly or indirectly, to make improper payments, including customs payments, and that we are in compliance with the FCPAâ€™s record-keeping requirements. Although we have had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by us to foreign or domestic officials, we have adopted additional measures intended to enhance FCPA compliance procedures. Further measures may be required once the investigation concludes.
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2008 and 2007
Net income for the three months ended September 30, 2008 (the â€śCurrent Quarterâ€ť) was $383 million, on operating revenues of $862 million, compared to net income for the three months ended September 30, 2007 (the â€śComparable Quarterâ€ť) of $318 million, on operating revenues of $791 million.
Rig Utilization, Operating Days and Average Dayrates
Operating revenues and operating costs and expenses for our contract drilling services segment are dependent on three primary metrics â€” rig utilization, operating days and dayrates. The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for the three months ended September 30, 2008 and 2007:
Operating Revenues. Contract drilling services revenue increases for the Current Quarter as compared to the Comparable Quarter were primarily driven by increases in average dayrates. Average dayrates increased revenues approximately $147 million, while fewer operating days reduced revenues approximately $31 million.
Average dayrates increased 20 percent in the Current Quarter as compared to the Comparable Quarter. Higher average dayrates were received across all rig categories, except for our submersible rigs, which were impacted by weakening demand in the shallow waters of the U.S. Gulf of Mexico.
The decrease in operating days in the Current Quarter as compared to the Comparable Quarter was primarily due to downtime of certain rigs in the Current Quarter. Unpaid shipyard days increased 32 days in the Current Quarter as compared to the Comparable Quarter, as the Noble Roy Butler, Noble Max Smith and Noble George McLeod each spent time in the shipyard during the Current Quarter for rig modifications and regulatory inspections, and the Noble Roger Eason is completing repairs for fire damage suffered in November 2007. Additionally, the Noble Fri Rodli, Noble Don Walker, Noble Roy Butler and Noble Carl Norberg spent an aggregate of 267 days stacked during the Current Quarter. The aggregate number of stacked days in the Comparable Quarter was 63 days. These decreases in operating days were partially offset by increased operating days of 64 days for the enhanced premium jackup Noble Roger Lewis , which was added to the fleet in September 2007.
Lee M. Ahlstrom - Vice President of Investor Relations
Thank you, Tiya. Welcome everybody to today's third quarter 2008 earnings call for Noble Corporation. Before we begin I would like to remind everyone that statements we make today about our plans, expectations, estimates, predictions or similar expressions for the future are forward-looking statements and are subject to risks and uncertainties. Our filings with the U.S. Securities and Exchange Commission which are posted on our website discuss the risks and uncertainties in our business and the industry and the various factors that could keep outcomes of any forward-looking statements from being realized.
Our actual results could differ materially from our expectations. We have included detailed balance sheets, and income and cash flow statements with our earnings news release. Also when we open up for questions, I'm going to ask you to stick to one question with one follow-up. I am sure you'll understand, we'll have a large number of folks who'd like the opportunity to have a question and we want to be fair to everyone. So if you ask a question and your follow-up and you want get back in the queue that's just fine.
With that, I will turn the call over to David Williams, our Chairman, President and Chief Executive Officer.
David W. Williams - Chairman, Chief Executive Officer and President
Okay thanks Lee. Good afternoon and thanks for joining us today. A lot has happened since our last call, at Noble in the industry, in the broader markets and we're looking forward to give you an update on Noble and our view of the world as it happened just yesterday.
Following my remarks, Tom Mitchell, our CFO will go with some of the financial highlights during the quarter and Kurt Hoffman, our VP of Worldwide Marketing will briefly review our markets and then we will open it up to questions.
Let me start by saying that despite the performance of the equity markets over the last few weeks and our business they are not coming in great shape. The results we reported last night are solid especially considering $20 million of loss revenue and $10 million of additional expense related to Hurricanes Gustav and Ike during September. While the financial crisis has impacted the global economies from the credit markets to commodity prices we continue to have confidence in our business.
The world still runs on oil and gas, and the meltdown in the financial sector we lost the confidence and the equity markets have not changed this fundamental fact. Effectively the only thing that's changed for us in the last 90 days is our share price but our operating activities, our modeling activities, our strategic evaluations are all ongoing and so far are all largely unaffected.
We plan and run our business for the long-term as do our customers; offshore exploration particularly in deepwater is a well developed and fundamental long-term strategy for our customers. Likewise, our evolution towards technology and deeper water rigs is a result of the same strategic long-term focus. Both our customer strategies and our own were conceived a long ago not just over the summer or as a result of $100 oil.
Those of us who have been in this business for a while are well acquainted with the cycles, the ups and the downs and the opportunities that arise during either phase. Having said that, let me address some of the concerns that we are hearing from the market.
First, our backlog is extremely strong at over $12 billion our fleet backlog has never been great or more secure, plus I like our customer base. We've got about 17% of the backlog with national oil companies such as PEMEX, Petrobras, Qatar Gas, and Dubai Petroleum and super majors like Exxon, Shell and Chevron.
Other majors and large independents like Marathon, Anadarko, Gaz De France, make up an additional 16% and the remainder is with smaller companies, the ones in whom we both have confidence and great relationships. We believe that our customers are financially sound, fully capable of honoring the commitments and we haven't received so much of even a phone call from anyone suggesting they may have a problem. So, on this front we think we are in great shape.
Let me talk briefly about our new bill program. In September we announced agreements to construct an ultra deepwater drill ship that we call Globetrotter for an all in price of $585 million. Given recent events some have questioned the timing of this decision, but the addition of this rig at this price reflects our long-term strategic view that the deepwater market will be strong for years to come. We will fully support this investment.
This unit is an innovative and highly competitive design that has generated great interest among our customers. We've priced up since to add three additional Globetrotters to the fleet that that expire about 60, 90 and 150 days respectively. Although we announced the first retrospect, we don't intend to out run our head lines, in other words I think its very unlikely to see us exercise the option for Globetrotter II without a contract for Globetrotter I and so forth, so on.
Before I turn this over to Tom, let me briefly touch on some potential M&A activity. I can remember certain meetings back in January and saying that from an opportunity perspective the best thing that might be happening for us is commodity price to pull back and stay in a lower range for a while. Notionally, we believe this scenario could put pressure on some spec bill players and perhaps even a few others and potentially creates some opportunities for us, given our... the strength of our balance sheet and the free cash flow. 10 months later we're in the pull back in oil prices but, the result of the credit crunch it's allowing somebody's opportunities to start to emerge.
One specular financial group that is effectively bankrupt and the rig is being sold off piecemeal, several others appear to be on the brink of similar difficulties and maybe having problems arranging for the financing. This could lead to additional rigs becoming available.
As always we will continue to be disciplined in our evaluation process, looking at pricing, risks and contract status of available assets and comparing each of those to each other and our Globetrotter opportunities.
Even with current product pricing, it's not yet clear whether or not a significant pullback is coming offshore. However, those drillers and/or speculators who were not fully capitalized could clearly have problems if credit markets don't ease up some. The number in appeal of these potential opportunities are yet to be determined. However, if and when they manifest themselves we'll be ready.
With that I'll turn it over to Tom.
Thomas L. Mitchell - Senior Vice President and Chief Financial Officer
Thank you, David. Our results for the quarter are very straight forward and I only plan to touch on some of the highlights.
Last night we released earnings of $383 million for the third quarter or $1.43 for fully diluted share. This compares to earnings of $376 million or $1.40 per share in second quarter of '08. But remember that the second quarter earnings included an $0.11 per share gain on the sale of our North Sea labor contract business.
Contract drilling services revenues were up almost 7% from last quarter, as 10 rigs in a fleet rolled to higher day rates, in particular the sig areas began a 10 months contract in August, with Chevron in Brazil. At $525,000 a day up from its previous rate of $124,000 a day. And the Noble Max Smith up higher from much of the second quarter while it was in the yard preparing to move to Mexico started its three year contract with PEMEX at $484,000 a day.
The cost line was also a positive story during the quarter with contract drilling services cost down about 1% quarter-on-quarter. The main driver here was lower spending on repair and maintenance and operation support.
Our per day cost were actually down 1.4% on the second quarter. Through the third quarter daily contract cost of $52,300 were up only 9.3% from our fourth quarter '07 levels which is actually a bit below the guidance range of a 10% to 15% increase.
These savings are result of intense focus on cost control and do not represent cost deferrals. So for the full year we now expect to come in near the bottom of our guidance range which was $1.1 billion plus or minus $50 million.
You are well aware we experienced two hurricanes in the gulf during the quarter and we disclosed on our fleet status that we incurred a $10 million expense or about $0.03 a share for our insurance deductible. We also lost $22 million or $0.07 per share in revenues from either zero rate or reduced rate days. So the storm impact overall was about $0.10 per share after tax.
G&A was down $3.6 million quarter-on-quarter, a little over $2 million of the decrease, relates to lower cost for the special investigation, Nigeria. Cost for investigation for the full quarter came in at $0.01 per share.
DD&A was up quarter-on-quarter driven by higher three and five year CapEx and some additional equipment and other assets entering service. And we expect to be near the top about $345 million to $355 million guidance range for the full year.
The tax rate was unchanged at 18.5% and you can expect that through the end of the year. So for the quarter we had a contract drilling margin of about 70% and after tax margin of 44% and a pre-utilization of 90%. Obviously, these pictures having been impacted by the storms.
We spent $355 million on capital projects during the quarter and through the nine months CapEx was $880 million. And we now expect full year guidance to come in around a $1.4 billion we originally gave you.
During the quarter we repurchased 1.4 million shares for a total cost of $262 million. Most of the stock was brought in early August and late September. These were periods during the quarter when we weren't blacked out due to earnings in July or during the final negotiations of our construction agreements on the Globetrotter projects. We have about 20 million shares remaining on our current authorization.
With our expenditures during the quarter we ended with up $214 million in cash on the balance sheet and net debt to cap of 12.8%... excuse me 12.8% gross debt to cap and net debt to cap at 9%.
Let me touch on two final topics. First, we don't have any 2009 guidance for you today. We understand you like to tune your models. But we are not far enough along to give you anything definitive at this point.
But just to give you some idea, why don't you hold the CapEx flat and increase your daily operating cost somewhere around the 10% level. But don't hold us to that at this point.
The second topic is our balance sheet and liquidity which are very strong. We're regenerating free cash flow above our capital program needs and expect our excess to grow substantially after the first quarter of next year. Our leverage is low with a net debt cap of 9% as I just mentioned and we have $520 million of undrawn capacity on our $600 million revolving credit facility.
In addition to our existing liquidity position, we believe the investment grade debt market even in this difficult credit market remains open to us. Should we choose to access it for some kind of opportunity.
Finally, as Kurt will review in a moment our backlog is substantial and particularly solid and it support of our cash flows for 2009. In fact, if you were to look at our un-contracted 2009 revenues in half, cash flow for the year is only reduced by 15%.
As David mentioned, the consolidation opportunities are beginning to pop-up and run a great place to move if there is value or we may to choose to sit back and watch our things unfold. We are in a very strong position.
With that let me turn it over to Kurt.
Kurt Hoffman - Vice President of Worldwide Marketing
Thank you, Tom. My comments today will be brief and focused on the backlog and the general nature of the markets. Noble's fleet contract and backlog position remains very strong.
Overall and excluding the three submersible units, we have 93% of our available days booked for 2008, 77% for 2009 and 40% for 2010. With the exception of the Noble Carl Norberg our deepwater fleet is fully committed during this period.
And looking at the jackups, the numbers are also strong for the remainder of 2008 through 2010. They are 90%, 70% and 20% respectively.
As of mid-October, our maximum contract backlog revenue potential was about $12 billion. This was fairly even with where we were on June 30th as well. The backlog figure includes earning maximum balances on our rigs in Brazil. Of that amount, about $2.8 billion is contributed by the jackup fleet with remainder coming from our deepwater assets.
Although, both David and Tom have mentioned this, I will like to add that I am confident in the strength of the backlog and the customers that comprise it. We have good contracts and we have no indications that our customers have any intentions other than meeting their obligations.
We signed relatively few contracts during the quarter and this is mainly driven by the fact that we are already so well contracted. I would, however, like to touch on some highlights.
In the deepwater market, we received a two-year contract from the Noble Paul Romano at a day rate of $605,000 a day and this is a fourth-generation EVA unit. In the North Sea, new contracts on the Noble Julie Robertson, the Noble Piet van Ede, and the Noble Lynda Bossler extended our coverage in this downs market into the third quarter of 2009.
The West African market continues to be slow in terms of new contract signings. However, we are very pleased to be awarded a two-year opportunity in Mexico for the Noble Carl Norberg which will mobilize in November.
We are also awaiting the formal results of our recent PEMEX tender. We have bid the Noble Roy Butler. And if we are successful in this tender, we're able to share the same heavy lift vessel as the Carl Norberg.
West Africa continues to lag in terms of maturing prospects and we're looking for the right opportunity to move the Roy Butler and our 150 foot independent large jackup in Noble Don Walker out of West Africa.
In the Middle East and India, we are engaged in bidding activity both in Saudi Arabia and with ONGC through our long-term partner Jindal and we look forward to those results before the end of this year.
In Mexico, PEMEX's tender activity has increased over the last several months which we see as a positive sign. Most of you, I'm sure are aware that last week PEMEX published and then turned around and cancelled a tender for four jackups and one deepwater rig.
Based on what we believe, the cancellation was a bureaucratic issue and is not a reflection of PEMEX suddenly deciding that we didn't need the rigs. We have heard that this tender is likely to be republished before the end of this year.
Finally in Brazil, we are aware of a number of companies were awarded LOIs in Petrobras' recent deepwater rig tendering process. They maybe having some difficulty securing financing for these projects. While we don't believe it's likely that we or other major contractors would be interested in stepping into those agreements due to low day rates contained within the LOIs, it has opened up some dialogue with Petrobras about additional opportunities for Noble.
Let me conclude with a few observations on the markets.
First deepwater rigs are still strong and the demand is there. Despite the drop in near-term oil price, our customers are doing long-range planning for 2011 and beyond and there is still a shortage of deepwater rigs.
We are in some good discussions with a number of potential customers for our first Globetrotter drill ship and secondly, we continue to have discussions with customers on jackup work and like our prospects of being able to contract some of these rigs that have availability in the first part of 2009.
That concludes my remarks and I will turn it back to David.
David W. Williams - Chairman, Chief Executive Officer and President
All right. Thank you Kurt. Before we open up for questions, let me summarize where we are today.
Our business is in great shape. We have numerous opportunities for our Globetrotter class rigs with several good dialogues ongoing and there are good opportunities for our jackups in markets where we have exposure.
We expect business to continue to remain strong after all the genesis in the current growth cycle is not the result of $100 oil, it started much earlier in the decade and a $100 milestone came further late in the game.
Keep in mind that we committed the Noble Danny Adkins and the Noble Jim Day upgrades for long term contracts when oil was around or it was actually just below in one case $60 a barrel. It's impossible for us to tell you what demand for our services will be a year from now when we actually begin to have some limited rig availability. If all the $50, that's one scenario it falls back between $80 and $90 or even higher, that is a different scenario for rig demand. But either way, we will be ready for it.
If the business does weaken, our backlog and balance sheet will sustain us and provide a tremendous platform with pursue acquisition targets. We can't control what the commodity price does or how the equity markets behave. Frankly, you have a lot more influence on that than we do. But what we can do and what we will do is do what we do. We'll execute everyday. We'll control our cost. We'll maximize our margins. We will deliver results and we will be prepared for opportunities.
And with that, we will open it up for questions.