Ocean Rig Reports First Quarter Activity and Updates Outlook
In the first quarter, Ocean Rig started drilling operations with the Company's first semisubmersible, Leiv Eiriksson, off the coast of Angola. This marks the first phase of the transition from conducting project development to operating as a drilling contractor with ordinary drilling operations. The Company's other drilling rig, Eirik Raude, is still under construction at a shipyard in Canada.
The Company posted a loss of NOK 66.3 million for the first quarter (NOK 179.3 million loss in the first quarter of 2001), corresponding to earnings per share of NOK -0.80 (NOK -4.03 in 2001). Until both the Company's drilling rigs are in operation, the financial statements primarily reflect the construction project, and are thus not representative of anticipated future earnings.
Leiv Eiriksson started drilling its first well offshore Angola on February 7. The well is on Block 33, with a water depth of 1790 meters. The work on this well was completed on April 14, and the rig is now drilling on Block 15, at a water depth of 1485 meters.
In the first quarter, the rig has had an effective capacity utilization of 88 percent since it started operation on February 7, which the Company regards as an acceptable level for the first well. It is expected that the capacity utilization will gradually increase when the crew and management on the rig have gained more experience.
Revenue for the first quarter has been equivalent to USD 152,000 per day since the rig started the contract. The revenue is lower than the level anticipated by the Company in the longer term, but reflects a low rate on the first two wells, and efficiency that is lower than the long-term objective.
For the quarter as a whole, the operating costs for the rig excluding depreciation have totaled approximately USD 113,000 per day. The costs are higher than the Company had anticipated, which is attributable to additional staff and service from subcontractors in the start-up phase, and somewhat higher use of spare parts than had been assumed. It is expected that the costs will gradually normalize at a lower level as the Company gains further experience in the operation of the rig.
The rig Eirik Raude is being completed at Halifax Shipyard in Canada. The Company announced in February that completion of the rig was anticipated to cost approximately USD 25 million more than previously assumed. After a review of the project and reconciliation of completion estimates, it is expected that costs will increase by approximately USD 45 million and startup of the rig contract with EnCana is postponed to September 1, 2002.
On the whole, the progression of the construction project has been a little slower than the timeframe which was drawn up in February. The amount of change orders and repair of errors made from the prior shipyard have however, increased the amount of work needed to finish the rig. The mechanical work on the rig will soon be complete, and the rig will then leave the quay and start sea trials. The Company has gained valuable experience from the completion, testing and commissioning of Leiv Eiriksson, which has been the basis for planning the final phase of the construction project, and the test phase for Eirik Raude.
To ensure efficient completion of the construction work, the company will seek to complete most of the work while the rig is still at the yard. The intention is that as many projects as possible will be concluded while the rig is still docked. Much of the test program for the rig will therefore be conducted before the rig starts sea trials. The test program has been defined in advance and approved by PanCanadian, now EnCana, to ensure a rapid and effective test process.
As a result of the delayed startup for Leiv Eiriksson and the cost overruns for the completion of Eirik Raude, the Company required additional financing for the period until both rigs are in normal operation. An extraordinary general meeting was held on April 2, and it was resolved that a private placement of 24.4 million shares should be undertaken. This provided the Company with approximately USD 25 million in new capital.
The Company has secured additional financing to cover the Company's financial need until the rig has been delivered. The Company has, in cooperation with some of its major shareholders, completed a financing solution consisting of a private placement of shares and a short term loan combined with the issuance of warrants. Based upon the assumption that the financing solution will be accepted by the General Meeting, the Company will be induced with USD 75 million in new liquidity. The Board will suggest that minor shareholders who were not invited to participate in the above mentioned financing solution will obtain an offer to participate in a second share issue, the subsequent share issue.
Leiv Eiriksson has a contract with a firm period that is expected to expire at the end of the fourth quarter of this year. There are options for up to six further wells. The Company is actively marketing the rig to secure deployment after the existing contract period.
Eirik Raude has a contract for a fixed period of 6-8 months after delivery, and the customer has an option for a further 3 wells. The firm portion ensures deployment until the first quarter of 2003, but the Company expects that the rig will also be utilized in Canada for most of 2003.
An increase in oil prices is expected to have a positive effect on the demand for drilling services. Drilling activity in deep water is an area of focus for a number of oil companies, and primarily applies to areas outside OPEC. Activity in deep water is expected to increase, and combined with the limited supply of rigs and ships that can carry out this type of operation, there is good potential for the deepwater market to strengthen in future.
Until the rig Eirik Raude is in operation, the Company still expects to show losses. The Company has contracts for both the rigs and has thus ensured deployment for 2002. In the Board's opinion, prospects for obtaining further deployment for the rigs are favorable.