ATWOOD OCEANICS, INC ANNUAL REPORT

Transcription

1 ATWOOD OCEANICS, INC ANNUAL REPORT

2 2006 ANNUAL REPORT TO SHAREHOLDERS THE COMPANY This Annual Report is for Atwood Oceanics, Inc. and its subsidiaries, which are collectively referred to as we, our, or the Company except where stated otherwise. We are engaged in the international offshore drilling and completion of exploratory and developmental oil and gas wells and related support, management and consulting services. Presently, we own and operate a premium, modern fleet of eight mobile offshore drilling units and manage the operations of two operator-owned platform drilling units currently located in Northwest Australia. Since fiscal year 1997, we invested approximately $510 million in upgrading seven mobile offshore drilling units and constructing an ultra-premium jack-up unit, the ATWOOD BEACON. Upon its expected delivery on or before September 2008, the ATWOOD AURORA will be our ninth active mobile offshore drilling unit. We support our operations from our Houston headquarters and offices currently located in Australia, Malaysia, Malta, Egypt, Indonesia, Singapore and the United Kingdom. FINANCIAL HIGHLIGHTS (In Thousands) FOR THE YEAR ENDED SEPTEMBER 30: REVENUES $276,625 $176,156 NET INCOME 86,122 26,011 CAPITAL EXPENDITURES 78,464 25,563 AT SEPTEMBER 30: NET PROPERTY AND EQUIPMENT $436,166 $390,778 TOTAL ASSETS 593, ,694 TOTAL SHAREHOLDERS EQUITY 458, ,137

3 CONTRACT REVENUES ($ MILLIONS) CAPITAL EXPENDITURES ($ MILLIONS) OPERATING INCOME ($ MILLIONS) NET INCOME (LOSS) ($ MILLIONS)

4 PRESIDENTS MESSAGE TO OUR SHAREHOLDERS AND EMPLOYEES: We are pleased to report revenues, operating cash flows and net income for fiscal year 2006 were the highest in our thirty-nine year history. Our net income of $86 million, or $2.74 per diluted share, was more than twice our previous record net income in fiscal year year 2006 ends with the Company in a strong position for the future. Our fleet utilization for the fiscal year was 100% and there were a number of accomplishments during the fiscal year in other key areas. Our contract backlog in terms of available rig days for our eight units, all contracted at historically high dayrates, is approximately 95% for fiscal year 2007, 80% for fiscal year 2008 and 40% for fiscal year This contract backlog provides strong upside visibility for fiscal year 2007 and further upside potential beyond fiscal year 2007, particularly with our deepwater and international jack-up leverage and with the ATWOOD HUNTER, ATWOOD SOUTHERN CROSS and RICHMOND contracts repricing in fiscal year Also, this year, our future visibility is enhanced with the change from well or well-to-well contracts to term contracts on the VICKSBURG, ATWOOD HUNTER, ATWOOD FALCON, SEAHAWK and ATWOOD BEACON. The ATWOOD SOUTHERN CROSS has a contract that continues into fiscal year 2008, and the ATWOOD EAGLE has a two-year contract at a high dayrate, currently estimated to commence in the first quarter of fiscal year Our new, ultra-premium jack-up, the ATWOOD AURORA, scheduled for delivery on or before September 2008, will offer growth potential when it commences operation as our ninth owned offshore drilling unit. Our remaining unit, the RICHMOND, is operating in the U.S. Gulf of Mexico. The RICHMOND has operated profitably in the Gulf of Mexico for many years. We continue to focus daily on safe, high standards of performance, our people and the continuing development of our organization for the future. Our safety and operational performance this fiscal year has been recognized by many of our clients. The Company also continued its fleet upgrade, enhancement and new construction program during the year with the successful completion of three shipyard update projects (the ATWOOD SOUTHERN CROSS, SEAHAWK and ATWOOD FALCON). Total expenditures of approximately $50 million for these projects brought our total project expenditures, since 1997, for fleet upgrade, renewal and construction completed, to over $500 million. Construction of our new, ultra-premium jack-up, the ATWOOD AURORA, also commenced this year. We are pleased with the Company s current position: a strong balance sheet with a current debt to total capitalization ratio of approximately 12% and a continuing trend for improvements in cash flows and financial results at historic levels. The demand by our clients for the services and equipment that our Company provides continues at a high level. Our strategy of focusing on safe, quality operations, premium equipment, long-standing client relationships, and being leveraged to attractive international markets has served us well and we believe will serve us well in the future. We are in a position to be opportunistic, when the time is right, and, accordingly, continue to pursue and explore other future opportunities, as well as evaluating the best use of future cash flow balances. As always, we thank our shareholders for their confidence and our employees for their many contributions and achievements during fiscal year 2006, and we look forward to fiscal year JOHN R. IRWIN

5 WORLD WIDE Great ATWOOD SOUTHERN CRO Corporate Headquarters RICHMOND ATWOOD HUNTER Malta C SEAHAWK Legend Office / Shorebase Rig * Rig locations are as of December 12, **The rig is being mobilized to India with estimated arrival before the end of December

6 PERATIONS* Yarmouth SS airo ATWOOD BEACON** Kuala Lumpur Singapore VICKSBURG ATWOOD FALCON Jakarta ATWOOD EAGLE NORTH RANKIN A GOODWYN A Perth 5

7 ATWOOD FALCON The ATWOOD FALCON is currently working offshore Malaysia following its shipyard water depth upgrade and equipment refurbishment which was completed in November The rig has current contract commitments that extend to July ATWOOD BEACON The ATWOOD BEACON is currently being mobilized to India. Upon the rig s arrival in India, it will commence working under a twenty-five (25) month contract which should extend to January

8 ATWOOD SEAHAWK The SEAHAWK is currently working offshore Equatorial Guinea following its shipyard upgrade and relocation from Southeast Asia. The rig has a current contract commitment that extends through fiscal year 2008 and, if all options are exercised, could extend through fiscal year

9 Atwood Oceanics, Inc. and Subsidiaries FIVE YEAR FINANCIAL REVIEW At or For the Years Ended September 30, (In thousands, except per share amounts, fleet data and ratios) STATEMENTS OF OPERATIONS DATA: Revenues..... $ 276,625 $ 176,156 $163,454 $144,765 $149,157 Contract drilling costs... (144,366) (102,849) (98,936) (98,500) (75,088) Depreciation.... (26,401) (26,735) (31,582) (25,758) (23,882) General and administrative expenses..... (20,630) (14,245) (11,389) (14,015) (10,080) Gain on sale of equipment ,548 OPERATING INCOME... 95,776 32,327 21,547 6,492 40,107 Other expense..... (3,940) (6,719) (9,145) (4,856) (1,330) Tax (provision) benefit... (5,714) 403 (4,815) (14,438) (10,492) NET INCOME (LOSS)..... $ 86,122 $ 26,011 $ 7,587 $ (12,802) $ 28,285 PER SHARE DATA(1): Earnings (loss) per common share: Basic.... $ 2.78 $ 0.86 $ 0.27 $ (0.46) $ 1.02 Diluted..... $ 2.74 $ 0.83 $ 0.27 $ (0.46) $ 1.01 Average common shares outstanding: Basic ,936 30,412 27,718 27,692 27,678 Diluted ,442 31,220 28,064 27,692 27,988 FLEET DATA: Number of rigs owned or managed, at end of period Utilization rate for in-service rigs(2) % 98% 93% 92% 86% BALANCE SHEET DATA: Cash and cash equivalents.... $ 32,276 $ 18,982 $ 16,416 $ 21,551 $ 27,655 Working capital ,308 35,894 32,913 26,063 43,735 Net property and equipment , , , , ,397 Total assets , , , , ,238 Total long-term debt (including current portion) ,000 90, , , ,000 Shareholders equity(3)(4) , , , , ,133 Ratio of current assets to current liabilities Notes (1) years 2005, 2004, 2003 and 2002 have been restated to reflect a two-for-one stock split effected on March 2, See Note 7 to the consolidated financial statements for further discussion. (2) Excludes managed rigs, the SEASCOUT (sold in fiscal year 2006), and contractual downtime on rigs upgraded. (3) We have never paid any cash dividends on our common stock. (4) In October 2004, we sold 2,350,000 shares of common stock in a public offering. 8

10 OFFSHORE DRILLING OPERATIONS Rig Name Year Upgraded Maximum Water Depth Percentage of FY 2006 Revenues Location at December 12, 2006 Customer Contract Status at December 12, 2006 SEMISUBMERSIBLES ATWOOD EAGLE 2000/2002 5,000 Ft. 17% Offshore Australia ATWOOD HUNTER 1997/2001 5,000 Ft. 23% Offshore Mauritania ATWOOD FALCON 1998/2006 5,000 Ft. 11% Offshore Malaysia ATWOOD SOUTHERN CROSS 1997/2006 2,000 Ft. 11% Offshore Turkey CANTILEVER JACK-UPS ATWOOD BEACON Constructed in Ft. 12% Mobilizing to India VICKSBURG Ft. 11% Offshore Thailand ATWOOD AURORA Under Construction BHP BILLITON PETROLEUM PTY ( BHPB ) WOODSIDE ENERGY, LTD. ( WOODSIDE ) SARAWAK SHELL BERHAD ( SHELL ) TOREADOR TURKEY LIMITED ( TOREADOR ) AND MELROSE RESOURCES ( MELROSE ) GUJARAT STATE PETROLEUM CORPORATION LTD. ( GSPC ) CHEVRON OVERSEAS PETROLEUM ( CHEVRON ) The rig is currently working under a drilling program for BHPB which could extend, if all option wells are drilled, to November Upon completion of this drilling commitment, the rig has a one (1) well contract commitment with ENI Australia BV, followed by a two (2) year contract commitment with Woodside Energy, Ltd. It should take until December 2009 before these drilling commitments are completed. The rig is currently working under a drilling program for Woodside which extends to April The rig is currently working under a long-term drilling commitment with Shell which extends to July The rig is currently working under drilling commitments for six (6) wells plus two (2) options for Toreador and Melrose which could take until July 2007 to complete. Following completion of these commitments, the rig has drilling commitments in the Black Sea for Turkiye Petrolleri A.O. and Vanco which could extend to April The rig is currently being mobilized to India to commence a twenty-five (25) month contract for GSPC. The rig is currently working under a long-term drilling commitment for Chevron which will extend to June Ft. 0% N/A N/A The rig is under construction in Brownsville, Texas with expected completion on or before September SUBMERSIBLE RICHMOND 2000/ Ft. 7% U.S. Gulf of Mexico HELIS OIL & GAS ( HELIS ) The rig is currently working for Helis under a contract which could extend to May/June

11 Rig Name Year Upgraded Maximum Water Depth Percentage of FY 2006 Revenues Location at December 12, 2006 Customer Contract Status at December 12, 2006 SEMISUBMERSIBLE TENDER ASSIST UNIT SEAHAWK 1992/1999/ Ft. 4% Offshore Equatorial Guinea AMERADA HESS EQUATORIAL GUINEA, INC. ( HESS ) The rig is currently working under a two-year contractual commitment with Hess which extends to September Hess also has four (4) six-month options. MODULAR PLATFORMS GOODWYN A and NORTH RANKIN A MANAGEMENT CONTRACT N/A 4%* Australia WOODSIDE Both the GOODWYN A and NORTH RANKIN A are idle with planned breaks in drilling activity. We are currently providing rig maintenance services to these rigs. * For both units, collectively. 10

12 SECURITIES LITIGATION SAFE HARBOR STATEMENT Statements included in this report which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of In addition, we and our representatives may from to time to time make other oral or written statements which are also forward-looking statements. These forward-looking statements are made based upon management s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause our actual results of operations or our actual financial conditions to differ include, but are not necessarily limited to: our dependence on the oil and gas industry; the operational risks involved in drilling for oil and gas; changes in rig utilization and dayrates in response to the level of activity in the oil and gas industry, which is significantly affected by indications and expectations regarding the level and volatility of oil and gas prices, which in turn are affected by such things as political, economic and weather conditions affecting or potentially affecting regional or worldwide demand for oil and gas, actions or anticipated actions by OPEC, inventory levels, deliverability constraints, and future market activity; the extent to which customers and potential customers continue to pursue deepwater drilling; exploration success or lack of exploration success by our customers and potential customers; the highly competitive and cyclical nature of our business, with periods of low demand and excess rig availability; the impact of the war with Iraq or other military operations, terrorist acts or embargoes elsewhere; our ability to enter into and the terms of future drilling contracts; the availability of qualified personnel; our failure to retain the business of one or more significant customers; the termination or renegotiation of contracts by customers; the availability of adequate insurance at a reasonable cost; the occurrence of an uninsured loss; the risks of international operations, including possible economic, political, social or monetary instability, and compliance with foreign laws; the effect public health concerns could have on our international operations and financial results; compliance with or breach of environmental laws; the incurrence of secured debt or additional unsecured indebtedness or other obligations by us or our subsidiaries; the adequacy of sources of liquidity; currently unknown rig repair needs and/or additional opportunities to accelerate planned maintenance expenditures due to presently unanticipated rig downtime; higher than anticipated accruals for performance-based compensation due to better than anticipated performance by us, higher than anticipated severance 11

13 expenses due to unanticipated employee terminations, higher than anticipated legal and accounting fees due to unanticipated financing or other corporate transactions, and other factors that could increase general and administrative expenses; the actions of our competitors in the offshore drilling industry, which could significantly influence rig dayrates and utilization; changes in the geographic areas in which our customers plan to operate, which in turn could change our expected effective tax rate; changes in oil and gas drilling technology or in our competitors drilling rig fleets that could make our drilling rigs less competitive or require major capital investments to keep them competitive; rig availability; the effects and uncertainties of legal and administrative proceedings and other contingencies; the impact of governmental laws and regulations and the uncertainties involved in their administration, particularly in some foreign jurisdictions; changes in accepted interpretations of accounting guidelines and other accounting pronouncements and tax laws; the risks involved in the construction, upgrade, and repair of our drilling units; and such other factors as may be discussed in our reports filed with the Securities and Exchange Commission, or SEC. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. The words believe, impact, intend, estimate, anticipate, plan and similar expressions identify forward-looking statements. These forward-looking statements are found at various places throughout this report. When considering any forwardlooking statement, you should also keep in mind the risk factors described in our Form 10-K for the year ended September 30, 2006, particularly in Item 1A Risk Factors, to which this Annual Report is an exhibit, and in other reports or filings we make with the SEC from time to time. Undue reliance should not be placed on these forward-looking statements, which are applicable only on the date hereof. Neither we nor our representatives have a general obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof or to reflect the occurrence of unanticipated events. 12

14 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK Revenues, operating cash flows and net income for fiscal year 2006 were the highest in our thirty-nine year history. All of our eight drilling units have contractual dayrate commitments that are the highest in their respective histories. Currently, we have approximately 95% and 80% of our available rig days contracted for fiscal years 2007 and 2008, respectively. A comparison of the average per day revenues for fiscal years 2006 and 2005 for each of our eight drilling units to their highest currently contracted dayrate commitment is as follows: Average Per Day Revenues for Year 2005 Average Per Day Revenues for Year 2006 Highest Currently Contracted Dayrate Commitment Percentage Change From Year 2006 ATWOOD EAGLE.... $95,000 $129,000 $405, % ATWOOD HUNTER... $61, , ,000 42% ATWOOD FALCON... $82,000 83, , % ATWOOD SOUTHERN CROSS.... $30,000 82, , % ATWOOD BEACON.. $66,000 88, ,500 52% VICKSBURG... $65,000 82, ,000 88% SEAHAWK... $38,000 32,000 68, % RICHMOND... $33,000 55,000 80,000 45% The ATWOOD EAGLE is currently working under a contractual commitment offshore Australia at dayrates ranging from $150,000 to approximately $170,000 which should extend to November Following completion of this contract commitment, the rig will drill one (1) well at a dayrate of $360,000 and then commence a two-year contract commitment at a dayrate of $405,000 which should extend to December The ATWOOD HUNTER is currently working offshore Africa at dayrates ranging from $240,000 to $245,000 under a long-term contract commitment which should extend to April The ATWOOD FALCON has a contractual commitment offshore Malaysia at dayrates ranging from $93,000 to $200,000 which should extend into July Under this contractual commitment, during the period August 2006 to early November 2006 the rig incurred a $30 million water depth upgrade along with certain equipment refurbishments of which the customer will pay $24 million of such costs along with payment of a $90,000 dayrate during this shipyard period. The $24 million will be amortized into income on a straight-line basis over the term of the contract through July The ATWOOD SOUTHERN CROSS is currently working in the Black Sea and has several drilling commitments at dayrates ranging from $125,000 to $305,000 that should extend through the first half of fiscal year Currently, the ATWOOD BEACON is being relocated to India to commence a 25-month contract at dayrates ranging from $113,000 to $133,500. The VICKSBURG has contract commitments offshore Thailand at dayrates ranging from $94,500 to $154,000 that should extend to June The SEAHAWK is currently working offshore West Africa under a long-term drilling program that should extend to September This drilling contract provides for four six month options with a dayrate for the firm and option periods of $68,430. After the first year, the stated dayrate of $68,430 will increase based upon certain cost escalations. Our only rig in the U.S. Gulf of Mexico, the RICHMOND, has a current contract commitment at a dayrate of $80,000 which could extend to May/June The ATWOOD AURORA, an ultra premium jack-up to become our ninth owned offshore drilling unit upon its delivery, is under construction at Brownsville, Texas. The construction of this rig is currently expected to be completed on or before September 2008 at a total cost (including capitalized interest) of $160 million. The current strong market environment is not only supporting high equipment utilization with historical high dayrate environments, but also has resulted in a significant increase in our operating costs. Over the next few months, we expect daily operating costs for the ATWOOD EAGLE to average between $80,000 and $85,000. The ATWOOD HUNTER, during the time it works 13

15 offshore Mauritania and Libya, is expected to incur daily operating costs between $55,000 and $60,000; however, costs could be higher during any relocation period or during any period when the rig is undergoing required inspections. The ATWOOD HUNTER is expected to be off dayrate for ten to fourteen days in December 2006 for required regulatory inspections and maintenance. Operating costs during this period could average between $60,000 and $65,000 per day. We expect that the ATWOOD FALCON will incur average daily operating costs between $45,000 and $50,000 while working offshore Malaysia; however, costs will be significantly higher during the first quarter of fiscal year 2007 ($85,000 to $95,000 per day) due to expensing certain costs incurred during the period the rig was in the shipyard undergoing its water depth upgrade. The ATWOOD SOUTHERN CROSS is also expected to have average daily operating costs in the Black Sea between $45,000 and $50,000; however, during the rig s relocation to the Black Sea during October 2006, operating costs were expected to average around $60,000 per day. Operating costs for our bottom supported drilling units (ATWOOD BEACON, VICKSBURG, and RICHMOND) should average between $30,000 and $35,000 per day. The SEAHAWK is expected to incur operating costs between $60,000 and $65,000 per day while working offshore Equatorial Guinea; however, these figures include an approximate $16,000 per day amortization of certain deferred costs on a straight-line basis over the life of the applicable drilling contract which will be more than offset by the amortization of related deferred fees of approximately $19,000 per day which are also recognized and earned on a straight-line basis over the life of the contract. Operating costs will vary for all rigs depending upon each rig s specific operating activities. For example, cost may increase when a rig is being relocated to a new drilling location, when a rig is undergoing required inspection or when a rig is undergoing extraordinary maintenance or equipment replacement. Despite the increase in operating costs for fiscal year 2006, our operating results significantly increased for fiscal year 2006 compared to fiscal year Although we anticipate a continuing trend for increases in operating costs during the next fiscal year, with our backlog of contracted days providing increasing revenue expectations, we anticipate that revenues, operating cash flows and earnings for fiscal years 2007 and 2008 will reflect a significant improvement over fiscal year 2006 operating results and are expected to be the highest in our history. RESULTS OF OPERATIONS Year 2006 Versus Year 2005 Revenues for fiscal year 2006 increased 57% compared to the prior fiscal year. A comparative analysis of revenues by rig for fiscal years 2006 and 2005 is as follows: 2006 REVENUES (In millions) 2005 Variance ATWOOD HUNTER $ 62.8 $ 22.1 $ 40.7 ATWOOD SOUTHERN CROSS ATWOOD EAGLE RICHMOND ATWOOD BEACON AUSTRALIA MANAGEMENT CONTRACTS VICKSBURG ATWOOD FALCON SEAHAWK (2.3) $276.6 $176.1 $100.5 The increase in fleetwide revenues is primarily attributable to the increase in average dayrates due to improving market conditions and strong demand for offshore drilling equipment as noted in Market Outlook. Thus, unless otherwise noted below, the increase in revenues for each rig is due to the increases in contractual dayrates in fiscal year 2006 compared to fiscal year During the last quarter of fiscal year 2005, the ATWOOD SOUTHERN CROSS was relocated 14

16 from Southeast Asia to the Mediterranean Sea with no revenues being realized during this relocation period. This relocation resulted in earned mobilization fees for the ATWOOD SOUTHERN CROSS increasing from $0.8 million in fiscal year 2005 to $8.1 million in fiscal year 2006, which, along with increases in contracted dayrates accounts for its increase in revenues. Increases in revenues for the ATWOOD HUNTER, ATWOOD EAGLE, VICKSBURG, ATWOOD BEA- CON, ATWOOD FALCON and the RICHMOND were related to each of these drilling units working under higher dayrate contracts in fiscal year 2006 compared to fiscal year The increase in revenues from the AUSTRALIA MANAGE- MENT CONTRACTS was due to one of these managed rigs returning to active drilling. The decline in revenues for the SEAHAWK was due to the unit being upgraded in fiscal year 2006, with no revenues being realized during this upgrade period. Contract drilling costs for fiscal year 2006 increased 40% compared to the prior fiscal year. A comparative analysis of contract drilling costs by rig for fiscal years 2006 and 2005 is as follows: CONTRACT DRILLING 2006 COSTS (In millions) 2005 Variance ATWOOD SOUTHERN CROSS $ 24.2 $ 9.1 $15.1 ATWOOD HUNTER AUSTRALIA MANAGEMENT CONTRACTS ATWOOD EAGLE VICKSBURG ATWOOD BEACON ATWOOD FALCON RICHMOND SEAHAWK (1.5) OTHER $144.4 $102.8 $41.6 The increase in fleetwide drilling costs was primarily attributable to four areas: rising personnel costs due to wage increases, increased repairs and maintenance expenses and freight costs due to the amount and timing of various repairs and maintenance projects and equipment enhancements and rising insurance costs due to increased premiums. Thus, unless otherwise noted below, the increase in drilling costs for each rig is primarily due to the four areas mentioned above. Besides the four areas discussed above, the increase in drilling costs for the ATWOOD SOUTHERN CROSS is also due to $8.6 million of mobilization expense amortization during the fiscal year 2006, compared to $0.8 million of deferred mobilization expense during fiscal year 2005 as the rig relocated from Southeast Asia to the Mediterranean during the fourth quarter of fiscal year The increase in drilling costs for the ATWOOD HUNTER also includes higher agent commissions due to increased revenues when compared to the prior fiscal year and due to its relocation from Egypt to Mauritania where operating costs are higher. As previously mentioned, one of our managed platform rigs in Australia commenced a new drilling program during the current fiscal year, and thus, service activities for our AUSTRALIA MANAGEMENT CON- TRACTS for fiscal year 2006 have increased accordingly when compared to fiscal year The decrease in drilling costs for the SEAHAWK is due to $4.0 million of deferred mobilization costs for fiscal year 2006 due to the relocation of the rig from Southeast Asia to West Africa compared to no deferred mobilization costs in the prior fiscal year. Other drilling costs for fiscal year 2006 have increased primarily due to the recording of stock option compensation expense (resulting from adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123(R) on October 1, 2005) for field personnel. Depreciation expense for fiscal year 2006 decreased 1% as compared to the prior fiscal year. A comparative analysis of depreciation 15

17 expense by rig for fiscal years 2006 and 2005 is as follows: DEPRECIATION EXPENSE 2006 (In millions) 2005 Variance SEAHAWK $ 1.6 $ 0.5 $ 1.1 ATWOOD HUNTER VICKSBURG ATWOOD BEACON RICHMOND ATWOOD FALCON ATWOOD EAGLE (0.1) ATWOOD SOUTHERN CROSS (1.6) OTHER $26.4 $26.7 $(0.3) The increase in depreciation expense for the SEAHAWK was due to the completion of a $16 million life enhancing upgrade during the fourth quarter of the current fiscal year. During the first quarter of the current fiscal year, the ATWOOD SOUTHERN CROSS underwent a life enhancing upgrade whereby the useful life of the rig was extended from approximately two to five years. Depreciation expense for our other units was relatively unchanged in fiscal year 2006 as compared to fiscal year In October 2005, we sold our semisubmersible hull, SEASCOUT, for $10 million (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for approximately $15 million. For the 2006 fiscal year period, gains on the sales of these two assets and other excess equipment totaled approximately $10.5 million in the aggregate. We had no operations or revenues associated with these assets prior to their sale. General and administrative expenses for fiscal year 2006 have increased 45% compared to the prior fiscal year due primarily to the following: $3.7 million of stock option compensation expense (resulting from adoption of SFAS 123(R) on October 1, 2005), a $1.5 million increase in professional fees primarily related to higher Sarbanes-Oxley compliance costs, and a $0.6 million increase in annual bonus compensation. Interest expense has decreased primarily due to the reduction of our outstanding debt while interest income has increased when compared to the prior fiscal year due to higher interest rates earned on higher cash balances. Virtually all of our tax provision for fiscal year 2006 relates to taxes in foreign jurisdictions. As a result of working in foreign jurisdictions, we earned a high level of operating income in certain nontaxable and deemed profit tax jurisdictions which significantly reduced our effective tax rate for the current fiscal year when compared to the United States statutory rate. In addition, we reversed a $1.8 million tax contingent liability due to the expiration of the statute of limitations in a foreign jurisdiction. Also, we were advised by a foreign tax authority that it had approved acceptance of certain amended prior year tax returns. The acceptance of these amended tax returns, along with the fiscal year 2005 tax return in this foreign jurisdiction, resulted in the recognition of a $4.6 million tax benefit in the third quarter. Including the two previously mentioned discrete items, which reduced our rate by 7%, our effective tax rate for fiscal year 2006 was approximately 6%. Excluding any discrete items that may occur, we expect our effective tax rate to be approximately 15-20% for fiscal year 2007 due to increased earnings in foreign jurisdictions with high statutory tax rates. Year 2005 Versus Year 2004 Revenues for fiscal year 2005 increased 8% compared to the fiscal year A comparative 16

18 analysis of revenues by rig for fiscal years 2005 and 2004 is as follows: REVENUES (In millions) Variance ATWOOD EAGLE $ 34.6 $ 30.4 $ 4.2 ATWOOD FALCON ATWOOD BEACON AUSTRALIA MANAGEMENT CONTRACTS ATWOOD HUNTER RICHMOND VICKSBURG (0.7) ATWOOD SOUTHERN CROSS (1.7) SEAHAWK (4.7) $176.1 $163.5 $12.6 During fiscal year 2005, the ATWOOD EAGLE was fully utilized at dayrates ranging from $89,000 to $109,000 compared to approximately 90% utilization at the same dayrates during fiscal year The increase in revenues for the ATWOOD FALCON was due to the rig being fully utilized during fiscal year 2005 at an average dayrate of $82,000 compared to 90% utilization at an average dayrate of $78,000 during fiscal year The ATWOOD BEACON had average per day revenues during fiscal year 2005 of $66,000 (which includes 100 days of business interruption proceeds) compared to average per day revenues during fiscal year 2004 of $62,000 (which includes 35 days of business interruption proceeds and 30 days of zero rate downtime immediately following its July 2004 incident which damaged its legs and derrick). Refer to Note 4 to the consolidated financial statements for further discussion of the Atwood Beacon incident. Since the end of fiscal year 2001, there has been a planned break in drilling activities on the GOODWYN A and NORTH RANKIN A platform rigs during which we have provided a limited amount of maintenance services to these platform rigs. However, during fiscal year 2005, service activities for NORTH RANKIN A increased due to a planned drilling program to commence during fiscal year The ATWOOD HUNTER was fully utilized during fiscal year 2005 at an average dayrate of $61,000 compared to 95% utilization during fiscal year 2004 at an average dayrate of $55,000. The increase in revenue for the RICHMOND was due to an increase in the average dayrate from $26,000 during fiscal year 2004 to $33,000 during fiscal year Revenues for the VICKSBURG were relatively consistent for fiscal years 2004 and 2005 while revenues for the ATWOOD SOUTHERN CROSS declined due to a decrease in the amount of earned mobilization revenue from $4.1 million in fiscal year 2004 to $0.8 million in fiscal year 2005 as the rig relocated twice during fiscal year 2004 and only once during fiscal year This decrease was partially offset by an increase in dayrates ranging from $35,000 to $40,000 during fiscal year 2005 compared to $30,000 to $35,000 during fiscal year The SEAHAWK was fully utilized during the fiscal year 2004 at an average dayrate of $50,000 compared to 85% utilization during fiscal year 2005 at an average dayrate of $45,000. Contract drilling costs for fiscal year 2005 increased 4% compared to fiscal year A comparative analysis of contract drilling costs by rig for fiscal years 2005 and 2004 is as follows: CONTRACT DRILLING COSTS 2005 (In millions) 2004 Variance AUSTRALIA MANAGEMENT CONTRACTS $ 4.7 $ 2.1 $ 2.6 ATWOOD EAGLE RICHMOND SEAHAWK VICKSBURG ATWOOD HUNTER (0.1) ATWOOD FALCON (0.5) ATWOOD BEACON (1.7) ATWOOD SOUTHERN CROSS (3.2) OTHER $102.8 $98.9 $

19 With the increase in service activities for NORTH RANKIN A during fiscal year 2005 due to a planned drilling program to commence during fiscal year 2006, drilling costs as well as revenues increased from our management of this platform rig. The increase in drilling costs for the ATWOOD EAGLE was due to higher labor costs due to local operating requirements offshore Australia, its location for all of the fiscal year The increase in drilling costs for the RICHMOND and SEAHAWK were primarily due to higher repair and maintenance expenses incurred on the rigs during the fiscal year ended September 30, 2005 compared to the fiscal year ended September 30, Drilling costs for the VICKSBURG, ATWOOD HUNTER, and ATWOOD FALCON remained relatively consistent for fiscal year 2005 compared to fiscal year The decline in drilling costs for the ATWOOD BEACON was due to a decrease in repair and maintenance expenses primarily resulting from the recording of a $1.0 million insurance deductible during fiscal year 2004 related to damage incurred during the rig s July 2004 incident. During most of the fourth quarter of fiscal year 2005, the ATWOOD SOUTHERN CROSS was being mobilized from Southeast Asia to the Mediterranean. Virtually all costs incurred during a mobilization period are deferred and amortized as an expense over the term of the new contract. Having deferred mobilization costs at the end of fiscal year 2005 compared to having no such deferred costs at the end of fiscal year 2004 accounts for its decline in drilling costs. The increase of other drilling costs during fiscal year 2005 was due to a $1.0 million reduction in the amount of insurance premium refunds received during fiscal year 2005 when compared to fiscal year 2004 and also due to fiscal year 2004 including the settlement of a dispute with a client which resulted in a reduction of operation costs of $0.6 million along with various other increases of non-drilling unit specific costs. Depreciation expense for fiscal year 2005 decreased 16% as compared to fiscal year A comparative analysis of depreciation expense by rig for fiscal years 2005 and 2004 is as follows: DEPRECIATION EXPENSE 2005 (In millions) 2004 Variance ATWOOD SOUTHERN CROSS.. $ 4.5 $ 4.2 $ 0.3 VICKSBURG ATWOOD FALCON ATWOOD BEACON RICHMOND ATWOOD EAGLE (0.1) ATWOOD HUNTER (0.1) SEAHAWK (4.6) OTHER (0.6) $26.7 $31.6 $(4.9) Effective October 1, 2004, we extended the remaining depreciable life of the SEAHAWK from 2 months to 5 years. The depreciable life of this rig was extended based upon entry into a contract that extended the rig s commercial viability for up to 5 years, coupled with our intent to continue marketing and operating the rig beyond 2 months. The decrease in other depreciation is due to certain non-rig assets becoming fully depreciated during the last quarter of fiscal year 2004 and the first quarter of fiscal year Depreciation expense for our other units was relatively unchanged in fiscal year 2005 as compared to fiscal year General and administrative expenses for fiscal year 2005 increased 25% compared to fiscal year 2004 due to significantly increased professional fees primarily resulting from compliance requirements of the Sarbanes-Oxley Act and due to $0.7 million of bonuses paid during fiscal year 2005, compared with no bonus payments during fiscal year Although the level of our outstanding debt has been reduced significantly from fiscal year 2004, the reduction of interest expense was partially offset by rising interest rates during fiscal year Interest income has increased when compared to fiscal year 2004 due to higher interest rates earned on cash balances 18

20 and interest income earned on income tax refunds. Virtually all of our tax provision for fiscal years 2005 and 2004 related to taxes in foreign jurisdictions, with fiscal year 2005 also impacted by a $3.3 million United States tax benefit recognized. During fiscal year 2005 our provision was also offset by two other foreign discrete items. During the first quarter of fiscal year 2005, we received a $1.7 million tax refund in Malaysia related to a previously reserved tax receivable. In addition, a $1.0 million deferred tax benefit was recognized in June 2005 due to the filing and subsequent acceptance by the local tax authority, of amended prior year tax returns. On December 1, 2005, we received notification from the United States Department of Treasury that a previously reserved United States income tax refund we had been pursuing for over two years had been approved for payment. Based upon this approval, we reduced our income tax provision by the refund amount of $3.3 million for the year ended September 30, Furthermore, during fiscal year 2005, operating income earned in certain nontaxable and deemed profit tax jurisdictions was higher when compared to fiscal year 2004, including business interruption proceeds earned by the ATWOOD BEACON in a zero tax jurisdiction for approximately three and a half months, which contributed to our lower effective tax rate. As a result of these items, our effective tax rate for fiscal year 2005 was significantly less when compared to fiscal year 2004 and the United States statutory rate. LIQUIDITY AND CAPITAL RESOURCES Since we operate in a very cyclical industry, maintaining high equipment utilization in up, as well as down, cycles is a key factor in generating cash to satisfy current and future obligations. For fiscal years 2001 through 2005, net cash provided by operating activities ranged from a low of approximately $13.7 million in fiscal year 2003 to a high of approximately $62.3 million in fiscal year 2001 compared to net cash provided by operating activities of approximately $85.5 million for fiscal year Our operating cash flows are primarily driven by our operating income, which reflects dayrates and rig utilization. The low level of net cash provided by operating activities in fiscal year 2003 was due to a downturn in market conditions during which we pursued short-term contract opportunities in high operating cost areas in order to maintain high utilization of our fleet. Operating results in fiscal years 2004, 2005 and 2006 reflected continuing improvements in market conditions which enabled us to have higher cash flows and earnings in these years compared to fiscal year Due to the significant increase in future dayrate commitments at historically high levels, we have pursued longerterm contract opportunities for some of our drilling units. We currently have approximately 95% and 80% of our available operating rig days committed for fiscal years 2007 and 2008, respectively. With the current historically high dayrate commitments on all eight of our actively owned drilling units, we anticipate significant improvement in cash flows and earnings during fiscal years 2007 and Other than our expected capital expenditures of $110 million to $115 million for fiscal year 2007, the only additional cash commitment for fiscal year 2007, outside of funding current rig operations, is our required quarterly repayments under the term portion of our senior secured credit facility which will total $36 million for fiscal year We expect to generate more than sufficient cash flows from operations to satisfy all of these obligations. In October 2004, we sold in a public offering 2,350,000 shares of our common stock at an effective net price (before expenses) of $22.92 for net proceeds of approximately $53.6 million. We used these proceeds and cash on hand to repay the $55 million outstanding under the revolving portion of our credit facility. As of September 30, 2006, we only had $54 million outstanding under the term portion of our credit facility, with $10 million (repaid in October 2006) outstanding 19

21 under the revolving portion of our credit facility. Our total debt to capitalization ratio (debt/(debt + equity)) is 12% as of September 30, This ratio will continue to decline unless we identify an acceptable growth opportunity. However, we will continue to explore opportunities for value enhancing growth as they arise. We are in compliance with all financial covenants at September 30, 2006 and expect to remain in compliance with all financial covenants during fiscal year Further, at all times during fiscal year 2004, 2005 and 2006 when we were required to determine compliance with our financial covenants, we were in compliance with those covenants. Aside from the financial covenants, no other provisions exist in the credit facility that could result in acceleration of the April 1, 2008 maturity date. At September 30, 2006, the collateral for our credit facility consists primarily of preferred mortgages on all eight of our active drilling units (with an aggregate net book value at September 30, 2006 totaling approximately $397 million). We are not required to maintain compensating balances; however, we are required to pay a fee of approximately 0.60% per annum on the unused revolving portion of our credit facility and certain other administrative costs. In October 2005, we sold our semisubmersible hull, SEASCOUT, for $10 million (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for approximately $15 million. For the 2006 fiscal year period, gains on the sales of these two assets and other excess equipment totaled approximately $10.5 million in the aggregate. The approximate $26 million in cash received from the sales of excess equipment, plus borrowings under the revolving portion of our credit facility ($10 million outstanding at September 30, 2006) along with our operating cash flows, has allowed us to expend approximately $30 million toward the construction of the ATWOOD AURORA, approximately $16 million on upgrading the SEAHAWK, approximately $5 million in completing the ATWOOD SOUTHERN CROSS upgrade, approximately $16 million toward the ATWOOD FALCON upgrade and approximately $11 million in other capital expenditures during fiscal year 2006 and have cash and cash equivalents remaining on hand at September 30, 2006 of approximately $32 million. Our accounts receivable have increased by $40.4 million since September 30, 2005, primarily due to our increased rig utilization and higher dayrates. Our portfolio of accounts receivable is comprised of major international corporate entities with stable payment experience. Historically, we have not encountered significant difficulty in collecting receivables and typically do not require collateral for our receivables; however, we have a $0.8 million allowance for doubtful accounts at September 30, The insurance receivable of $0.6 million at September 30, 2005 and September 30, 2006, relates to repairs to be made to the ATWOOD BEACON. Final repairs on this rig were completed in November 2006, and we expect to collect the remaining $0.6 million insurance receivable associated therewith in fiscal year Long-term deferred credits have increased by $22.3 million since September 30, 2005, primarily due to deferred fees associated with the current fiscal year upgrades and mobilizations of the ATWOOD FALCON and SEAHAWK. Commitments The following table summarizes our obligations and commitments (in thousands) at September 30, 2006: and thereafter Long-Term Debt(1)... $36,000 $28,000 $ $ $ Purchase Commitments(2)... 61,854 28,282 Operating Leases... 1,916 1, ,570 $99,770 $57,384 $978 $845 $3,570 20

22 (1) Excluded from the above table is interest associated with borrowings under our credit facility because the applicable interest rate is variable. The principal amount outstanding under our credit facility included in the above table is $64 million which currently bears interest at a rate of approximately 7%. (2) Rig construction and upgrade commitments for the ATWOOD AURORA and the ATWOOD FAL- CON, respectively. CRITICAL ACCOUNTING POLICIES Significant accounting policies are included in Note 2 to our consolidated financial statements for the year ended September 30, These policies, along with the underlying assumptions and judgments made by management in their application, have a significant impact on our consolidated financial statements. We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. Our most critical accounting policies are those related to revenue recognition, property and equipment, impairment of assets, income taxes, and employee stock-based compensation. We account for the drilling and management contract revenue in accordance with the terms of the underlying drilling or management contract. These contracts generally provide that revenue is earned and recognized on a daily rate (i.e. dayrate ) basis and dayrates are typically earned for a particular level of service over the life of a contract. Dayrate contracts can be for a specified period of time or the time required to drill a specified well or number of wells. Revenues from dayrate drilling operations, which are classified under contract drilling services, are recognized on a per day basis as the work progresses. In addition, lump-sum fees received at commencement of the drilling contract as compensation for the cost of relocating drilling rigs from one major operating area to another, as well as equipment and upgrade costs reimbursed by the customer are recognized as earned on a straight-line method over the term of the related drilling contract, as are the dayrates associated with such contract. However, lump-sum fees received upon termination of a drilling contract are recognized as earned during the period termination occurs. In addition, we defer the mobilization costs relating to moving a drilling rig to a new area and customer requested equipment purchases that will revert to the customer at the end of the applicable drilling contract. We amortize such costs on a straight-line basis over the life of the applicable drilling contract. We currently operate eight active offshore drilling units. These assets are premium equipment and should provide many years of quality service. At September 30, 2006, the carrying value of our property and equipment totaled $436.2 million, which represents 73% of our total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate estimates, assumptions and judgments by management relative to the useful lives and salvage values of our units. Once a rig is placed in service, it is depreciated on the straight-line method over its estimated useful life, with depreciation discontinued only during the period when a drilling unit is out of service while undergoing a significant upgrade that extends its useful life. The estimated useful lives of our drilling units and related equipment range from 3 years to 25 years and our salvage values are generally based on 5% of capitalized costs. Any future increases in our estimates of useful lives or salvage values will have the effect of decreasing future depreciation expense in future years and spreading the expense to later years. Any future decreases in our useful lives or salvage values will have the effect of accelerating future depreciation expense. 21