We are one of the world’s largest offshore drilling contractors operating, as of February 19, 2010, a fleet of 23 rigs, consisting of two deepwater drillships, 12 semisubmersible rigs, seven jackups and two managed deepwater drilling rigs. We also have four deepwater drillships under construction. Our customers include major integrated oil and natural gas companies, state-owned national oil companies and independent oil and natural gas companies. Our competitors range from large international companies offering a wide range of drilling services to smaller companies focused on more specific geographic or technological areas.
We are continuing to increase our emphasis on deepwater drilling. Although crude oil prices have declined from the record levels reached in mid-2008, we believe the long-term prospects for deepwater drilling are positive given that the expected growth in oil consumption from developing nations, limited growth in crude oil supplies and high depletion rates of mature oil fields, together with geologic successes, improving access to promising offshore areas and new, more efficient technologies, will continue to be catalysts for the long-term exploration and development of deepwater fields. Since 2005, we have invested or committed to invest over $3.7 billion in the expansion of our deepwater fleet, including four new ultra-deepwater drillships under construction. Three of the drillships have multi-year contracts at favorable rates, with two scheduled to work in the strategically important deepwater U.S. Gulf of Mexico, which, in addition to our operations in Brazil and West Africa, provides us with exposure to all three of the world’s most active deepwater basins. Since 2005, we also have disposed of non-core assets, generating $1.6 billion in proceeds, enabling us to increasingly focus our financial and human capital on deepwater drilling. In addition, on August 24, 2009, we completed the spin-off of Seahawk Drilling, Inc., which holds the assets and liabilities that were associated with our mat-supported jackup rig business.
Our customers reduced exploration and development spending in 2009, especially in midwater and shallow water drilling programs, due to the economic downturn and decline in crude oil prices. We anticipate that deepwater activity will outperform other drilling sectors due in part to an early stage of exploration and production in most deepwater basins around the world, which has led to strong geologic success and should further lead to increased long-term client demand, as numerous field development programs are initiated, providing greater insulation from short-term commodity price fluctuations. Also, the average reserve estimates for many deepwater discoveries to date far exceed that of the shallow and midwater sectors, resulting in more favorable drilling economics. An increasing focus on deepwater prospects by national oil companies, whose activities tend to be less sensitive to general economic factors, serve to provide further stability in the deepwater sector. Our contract backlog at December 31, 2009 totals $6.9 billion and is comprised primarily of contracts for deepwater rigs with large integrated oil and national oil companies possessing long-term development plans.
We provide contract drilling services to oil and natural gas exploration and production companies through the use of mobile offshore drilling rigs in U.S. and international waters. We provide the rigs and drilling crews and are responsible for the payment of operating and maintenance expenses. In addition, we also provide rig management services on a variety of rigs, consisting of technical drilling assistance, personnel, repair and maintenance services and drilling operation management services.
Segment Information
We organize our reportable segments based on the water depth operating capabilities of our drilling rigs. Our reportable segments include Deepwater, which consists of our rigs capable of drilling in water depths of 4,500 feet and greater; Midwater, which consists of our semisubmersible rigs capable of drilling in water depths of 4,499 feet or less; and Independent Leg Jackups, which consists of our rigs capable of operating in water depths up to 300 feet. We also manage the drilling operations for deepwater rigs, which are included in a non-reported operating segment along with corporate costs and other operations.
Semisubmersible Rigs. Our semisubmersible rigs, six of which are in our deepwater fleet and six of which are in our midwater fleet, are floating platforms. They can be submerged to a predetermined depth, by means of a water ballasting system, so that a substantial portion of the lower hulls, or pontoons, is below the water surface during drilling operations. The rig is “semisubmerged,” remaining afloat in a position, off the sea bottom, where the lower hull is about 60 to 80 feet below the water line and the upper deck protrudes well above the surface. This type of rig maintains its position over the well through the use of either an anchoring system or a computer-controlled thruster system similar to that used by our drillships. Semisubmersible rigs generally operate with crews of 60 to 75 persons.
Independent Leg Jackup Rigs. The jackup rigs we operate are mobile, self-elevating drilling platforms equipped with legs that penetrate the ocean floor until a solid foundation is reached to support the drilling platform. Our jackup rigs are generally limited to operating in water depths of up to 300 feet. The length of the rig’s legs, sea bed condition, expected weather conditions, the presence of a platform and the positioning of the rig over the platform determine the water depth limit and suitability of a particular rig for a project. A cantilever jackup rig has a feature that allows the drilling platform to be extended out from the hull, enabling the rig to perform drilling or workover operations over a pre-existing platform or structure. Slot-type jackup rigs are configured for drilling operations to take place through a slot in the hull. Slot-type rigs are usually used for exploratory drilling because their configuration makes them difficult to position over existing platforms or structures. Jackups generally operate with crews of 40 to 60 persons.
Managed Deepwater Rigs. We perform rig management services for drilling operations for two deepwater rigs owned by others, located offshore Angola and in the U.S. Gulf of Mexico. Our services consist of providing technical assistance, personnel, repair and maintenance services and drilling operation management services. The drilling equipment, which we operate on behalf of our customers, is installed on tension-leg platform and semisubmersible hull designs. Due to the similar drilling equipment specifications and operations among our managed deepwater rigs and our owned deepwater rigs, our managed rig personnel and the rig crews on our owned rigs require similar experience and training.
Customers
We provide contract drilling and related services to a customer base that includes large multinational oil and natural gas companies, government-owned oil and natural gas companies and independent oil and natural gas producers. For the year ended December 31, 2009, Petroleo Brasilerio S.A. and Total S.A. accounted for 33% and 16%, respectively, of our consolidated revenues from continuing operations. The loss of any of these significant customers could have a material adverse effect on our results of operations.
Drilling Contracts
Overview
Our drilling contracts are awarded through competitive bidding or on a negotiated basis. The contract terms and rates vary depending on competitive conditions, geographical area, geological formation to be drilled, equipment and services to be supplied, on-site drilling conditions and anticipated duration of the work to be performed.
Oil and natural gas well drilling contracts are carried out on a dayrate, footage or turnkey basis. Currently, all of our offshore drilling services contracts are on a dayrate basis. Under dayrate contracts, we charge the customer a fixed amount per day regardless of the number of days needed to drill the well. In addition, dayrate contracts usually provide for a reduced dayrate (or lump-sum amount) for mobilizing the rig to the well location or when drilling operations are interrupted or restricted by equipment breakdowns, adverse weather conditions or other conditions beyond our control. Our dayrate contracts also generally include cost adjustment provisions that allow changes to our dayrate in order to keep our operating margin unchanged in times of increasing or decreasing operating costs. A dayrate drilling contract generally covers either the drilling of a single well or group of wells or has a stated term. In some instances, the dayrate contract term may be extended by the customer exercising options for the drilling of additional wells or for an additional length of time at fixed or mutually agreed terms, including dayrates.Another type of contract provides for payment on a footage basis, whereby a fixed amount is paid for each foot drilled regardless of the time required or the problems encountered in drilling the well. We may also enter into turnkey contracts, whereby we agree to drill a well to a specific depth for a fixed price and to bear some of the well equipment costs. Compared with dayrate contracts, footage and turnkey contracts involve a higher degree of risk to us.
Our customers may have the right to terminate, or may seek to renegotiate, existing contracts if we experience downtime or operational problems above a contractual limit or safety-related issues, if the rig is a total loss, if the rig is not delivered to the customer, or in certain circumstances does not pass acceptance testing, within the period specified in the contract or in other specified circumstances. In addition, a number of our long-term drilling contracts are cancelable by the customer for convenience upon the payment of a termination fee. The termination fees vary from contract to contract and range from (1) the remaining revenue under the contract to (2) the present value of the cash margin for the remaining term to (3) a reduced dayrate for the remaining term. For some contracts, the termination fee includes the payment of mobilization and demobilization fees and may be reduced to the extent of the dayrate obtained for the rig on another contract. For jackup rigs, certain customers may require contracts that are cancelable, without cause, upon little or no prior notice and without penalty or early termination payments. A customer is more likely to seek to cancel or renegotiate its contract during periods of depressed market conditions. We could be required to pay penalties if some of our contracts with our customers are canceled due to downtime, operational problems or failure to deliver. Suspension of drilling contracts results in the reduction in or loss of dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, or at all, or if contracts are suspended for an extended period of time, it could adversely affect our consolidated financial statements.
Deepwater
The Pride Africa is currently operating under a contract expiring in December 2011. In 2008, the Pride Angola obtained a five-year contract expiring in July 2013. In February 2008, the Pride Portland and the Pride Rio de Janeiro were awarded contract extensions into 2016 and 2017, respectively, in direct continuation of their current contracts. The Pride South Pacific completed a two-year contract in March 2009 and was awarded a one-year contract in 2009 commencing in January 2010. In November 2006, we were awarded five-year contract extensions that began in mid-2008 for the Pride Brazil and the Pride Carlos Walter and a three-year contract extension that began in early 2008 for the Pride North America. For information about the contract status of our four drillships under construction, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Investments in Deepwater Fleet” in Item 7 of this annual report.
Midwater
The Pride South America is operating under a five-year contract expiring in February 2012. The Pride Mexico commenced a five-year contract in July 2008. The Pride South Atlantic commenced its new five-year contract in April 2008. The Sea Explorer commenced a two-year contract in November 2009. During the second quarter of 2009, we and the customer mutually agreed to terminate the Pride Venezuela’s then-existing contract, thereby releasing the rig for mobilization to a shipyard in Dubai for further evaluation and completion of a rig refurbishment project, which is expected to be completed in the second quarter of 2010. The Pride Venezuela is being marketed for work in mid-2010 in several international areas. During the third quarter of 2009, the Pride South Seas concluded an eight well contract that had commenced in March 2008, and is currently in the process of being cold stacked with limited prospects for further work in the near to intermediate term.
IndOther Operations
Other operations include our deepwater drilling operations management contracts and other operating activities. Management contracts in 2009 included one management contract that ended in the third quarter of 2009 and two contracts that expire in March 2010 and 2012 (with early termination permitted in certain cases). Management contracts in 2008 included two additional contracts that ended in the third and fourth quarters of 2008. Additionally, the operations of our former shallow-water platform rig fleet, which were historically included in other operations, were part of Seahawk’s business that was distributed to our shareholders in August 2009.ependent Leg Jackups
During the third quarter of 2009, our two independent jackup rigs in the Gulf of Mexico, the Pride Wisconsin and Pride Tennessee, completed contracts, with no immediate prospects for work. The Pride Wisconsin is currently cold stacked and the Pride Tennessee is idle. Of our five independent leg jackup rigs operating outside the Gulf of Mexico, the Pride Hawaii is under contract to March 2010, the Pride Montana to June 2011 and the Pride North Dakota, inclusive of an unexercised priced option, to May 2010. The Pride Cabinda completed a one-year contract in August 2009, a two-month contract in October 2009 and a two-month contract in February 2010 and is currently in the shipyard completing leg repairs before commencing its next contract. The Pride Pennsylvania completed a three-year contract in October 2009 and is currently in the shipyard with no future contracted work.