For the nine months ended September 30, 2004, net income totaled $225.6 million, or $0.70 per diluted share, on revenues of $1,937.0 million, compared to net income of $13.7 million, or $0.04 per diluted share, on revenues of $1,842.8 million during the corresponding nine months in 2003. Net income adjusted(1) for the TODCO offerings, the sale of semisubmersible rig Sedco 602, early retirement of debt and TODCO IPO-related costs was $101.4 million, or $0.31 per diluted share, for the nine months ended September 30, 2004. For the nine months ended September 30, 2003, net income adjusted(1) for asset impairment charges, early retirement of debt, TODCO IPO-related charges and a favorable resolution of a non-U.S. income tax liability was $47.5 million, or $0.15 per diluted share.
Transocean Drilling Segment - Revenues for the three months ended September 30, 2004 were $558.7 million, compared to revenues of $552.5 million during the three months ended June 30, 2004. The slight improvement was due chiefly to improved performance of the company's High-Specification Floaters (semisubmersibles and drillships), as both average utilization and dayrates increased from the preceding three months, partially offset by the Trident 20 incident, which reduced revenues in the quarter by approximately $8 million. Revenues would have been an estimated $13 million higher, absent the Norwegian labor strike, which affected three rigs in the company's fleet. The Transocean Arctic, which returned to work in Norway on August 30 following 30 months of being idle, contributed to the improved utilization while higher average dayrates were driven in part by contract signings on the deepwater semisubmersible rig Cajun Express and drillships Deepwater Pathfinder and Deepwater Millennium. Operating income before general and administrative expenses,(2) including the gain on the TODCO secondary offering, was $218.1 million and field operating income (defined as revenue less operating and maintenance expenses) was $198.2 million for the three months ended September 30, 2004. The figures compared to operating income before general and administrative expense and field operating income of $127.2 million and $214.4 million, respectively, for the three months ended June 30, 2004. Operating and maintenance costs during the third quarter of 2004 increased 6.6% from levels in the preceding quarter due primarily to increased activity from semisubmersibles Transocean Arctic, Sedco 600 and Sovereign Explorer, as well as costs of approximately $7.0 million associated with repairs to the jackup rig Trident 20. Utilization of the segment's 94-rig fleet for the three months ended September 30, 2004 was 67%, including 81% utilization among the High-Specification Floaters compared to utilization of 68% for the segment and 79% for the High-Specification Floaters for the preceding three months in 2004. Average dayrates for the segment's 94-rig fleet improved to $90,700, including an average dayrate of $142,200 for the High-Specification Floaters for the three months ended September 30, 2004 compared to average dayrates of $89,100 and $141,100, respectively, for the preceding three months in 2004.
Customer demand for offshore drilling units continues to improve in several offshore drilling regions, providing contract opportunities generally of longer durations and increasing dayrates, a trend the company believes should continue into 2005. This trend is most pronounced in the company's High-Specification Floaters fleet, as customers address their 2005 deepwater exploration and development drilling requirements with what the company believes is a preference toward the enhanced efficiency of Fifth-Generation units. In August, the company signed the deepwater semisubmersible rig Sedco Express to a three-year contract in Angola and has recently received a contract for the drillship Deepwater Millennium for six months plus three, six-month options. Also, the drillship Deepwater Pathfinder will mobilize from the U.S. Gulf of Mexico to Nigeria for an anticipated multi-well, term project to commence during the fourth quarter of 2004. One of the company's Other Deepwater units, the semisubmersible rig Transocean Rather, is currently en route to the North Sea from West Africa to commence an expected drilling project during early-2005 in the North Atlantic. Although the current outlook for the industry's 24 Fifth-Generation Floaters is excellent, with the possibility of demand for these units exceeding supply during 2005, certain Transocean Fifth-Generation rigs are at risk of limited periods of downtime in the near-term, as they transition between contracts. Presently, the drillship Deepwater Millennium is idle in the U.S. Gulf of Mexico following completion of a contract. The rig is expected to commence its new contract on December 1, 2004.
The company's Other Floaters fleet has experienced significant under-utilization during 2004; however, improved business conditions are evident in certain regions like the U.K. sector of the North Sea and U.S. Gulf of Mexico. The company has recently received two contracts and a contract extension on three of its semisubmersibles in the U.K. sector of the North Sea and, as a result of increased customer demand, is in the process of reactivating two previously stacked semisubmersibles for drilling programs that are expected to commence during the first quarter of 2005. The two contract signings, on the semisubmersible rigs Sedco 704 and Transocean John Shaw, are at dayrates of $91,000 and $85,000, respectively, which are evidence of the improving drilling environment. The company is also reviewing opportunities to reactivate one or two of its idle semisubmersibles in the U.S. Gulf of Mexico.
Customer demand for international jackup rigs remains steady, especially in the Far East and Middle East regions, with utilization and dayrates expected to remain firm to modestly higher through 2005. The company has completed the previously announced mobilizations of jackup rigs Trident VI and J.T. Angel to India and Indonesia, respectively, with both units expected to commence new contracts during the fourth quarter of 2004. Mobilization of the jackup rig Shelf Explorer to Indonesia is in progress, with the rig expected to commence a new contract by late-fourth quarter 2004.
The company remains exposed to certain events during the fourth quarter of 2004 which could reduce profitability over the final three months of the year. These events include the Norwegian labor strike, which has entered its 16th week, affecting the semisubmersible rigs Transocean Leader, Transocean Searcher and Polar Pioneer, and ongoing repairs to the semisubmersible rig Jim Cunningham and jackup rig Trident 20 following operational incidents. The two rigs are expected to be out of service for the majority of the quarter with repair, crew and other costs in the quarter estimated to be in a range of $20 million to $25 million. Also, downtime will be incurred on the drillship Deepwater Pathfinder and semisubmersible rig Transocean Rather as the units mobilize to Nigeria and the North Sea, respectively. Finally, the drillship Deepwater Millennium could be idle for approximately 45 days as it transitions between contracts.
Effective Tax Rate(3) - Tax expense for the third quarter of 2004 totaled $6.3 million, or 3.9% of pretax income for the quarter. The company's estimated effective tax rate for the fourth quarter and full year is expected to be approximately 44%. This rate includes nearly 7 percentage points associated with an increase in the valuation allowance established at the time of the TODCO IPO. The estimated effective tax rate is subject to change and could vary significantly from current expectations.
TODCO Segment - Revenues for the three months ended September 30, 2004 were $93.1 million. The segment reported an operating loss before general and administrative expenses(2) of $2.4 million and field operating income(2) of $20.7 million for the three months ended September 30, 2004.
Liquidity - Cash flow from operations totaled $506.6 million for the nine months ended September 30, 2004. Total debt at September 30, 2004 was $3,061.4 million. Net debt(4) was $2,285.6 million at September 30, 2004, down 28% from $3,184.1 million at December 31, 2003. On October 25, 2004, the company completed the redemption of its $342.3 million face value, 6.75% Senior Notes due April 2005. A loss on redemption of $3.3 million will be recognized in the fourth quarter of 2004.
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