ATWOOD OCEANICS, INC ANNUAL REPORT

Transcription

1 ATWOOD OCEANICS, INC ANNUAL REPORT

2 2005 ANNUAL REPORT TO SHAREHOLDERS THE COMPANY 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. From fiscal year 1997 to 2003, we invested approximately $460 million in upgrading seven mobile offshore drilling units and constructing an ultra-premium jack-up unit. We support our operations from our Houston headquarters and offices currently located in Vietnam, Australia, Malaysia, Egypt, Indonesia, Singapore and the United Kingdom. FINANCIAL HIGHLIGHTS (In Thousands) FOR THE YEAR ENDED SEPTEMBER 30: REVENUES $176,156 $163,454 NET INCOME 26,011 7,587 CAPITAL EXPENDITURES 25,563 6,527 AT SEPTEMBER 30: NET PROPERTY AND EQUIPMENT $390,778 $401,141 TOTAL ASSETS 495, ,936 TOTAL SHAREHOLDERS EQUITY 362, ,589

3 CONTRACT REVENUES ($ MILLIONS) CAPITAL EXPENDITURES ($ MILLIONS) (Net of Insurance Reimbursement) OPERATING INCOME ($ MILLIONS) NET INCOME (LOSS) ($ MILLIONS)

4 PRESIDENT S MESSAGE TO OUR SHAREHOLDERS AND EMPLOYEES: During fiscal year 2005, we recorded improved profitability with a net income of approximately $26 million, or $1.71 per share, and an equipment utilization rate of 98%. We ended fiscal year 2005 with a strong balance sheet, an excellent contract backlog, high demand from our clients and a positive future outlook. Effective worldwide utilization of offshore drilling equipment is over 97% with tightness in all of our markets, both geographically and by type of unit. We also continue to see high levels of bid activity for future opportunities around the world with our clients planning and committing on drilling units further in advance. We have taken advantage of the strong market environment to build a contract back log with record dayrates for all eight of our units. Currently, we have approximately 90% and 70% of our available rig days contracted for fiscal years 2006 and 2007, respectively. Completion in 2003 of our $460 million major upgrade and new construction program has resulted in us having eight active units well-positioned for attractive opportunities and significant market improvements. With our contract back log and the current strong market environment supporting high equipment utilization and historically high dayrates for our eight units, we expect significantly improved cash flow and operating results in fiscal year 2006 compared to fiscal year Our contract backlog and current contract mix also provide the potential for further upside in fiscal year The ATWOOD EAGLE, ATWOOD HUNTER, ATWOOD FALCON, ATWOOD BEACON and SEAHAWK all have contract commitments through fiscal The ATWOOD FALCON has a future contract that provides for an upgrade to 5,000 ft. water-depth capability in Malaysia, with our client paying a fee and a dayrate during the upgrade. The SEAHAWK will also undergo an upgrade for a two-year contract commencing during the fourth quarter of fiscal year We expect contract rollovers for our three drilling units with contracts expiring in fiscal year 2006 or 2007 with the potential for further improvements in dayrates: early calendar year 2007 for the VICKSBURG; late calendar year 2006 or early calendar year 2007 for the ATWOOD SOUTHERN CROSS; and the first half of calendar year 2006 for the RICHMOND. In addition to our eight owned units, we have management contracts for two client-owned platform rigs in Australia. We understand that renewed drilling operations for one platform rig are currently targeted for commencement during the second quarter of fiscal year 2006 for a period of eight to nine months. We are pleased with our performance and current position. The longer-term fundamentals in our industry are strong and provide upside potential and opportunities in fiscal year 2006 and beyond. Our strategy to focus on providing premium equipment and safe, quality services in attractive international markets based on long-standing client relationships has served us well. The quality, talent and hard work of our employees around the world is more important than ever in today s environment, and we believe our employees performance will be an important factor in attracting clients. We believe that our ability to be responsive to our clients needs is another key factor in our client relationships, performance and success. Our strong position and today s positive market outlook are exciting and we look forward to seeking further opportunities to improve our performance. We thank our shareholders for their confidence and trust and our employees whose hard work and contributions have produced the improved results reported for fiscal year JOHN R. IRWIN 3

5 WORLD WIDE Great Yarmouth Corporate Headquarters ATWOOD SOUTHERN CROSS RICHMOND Legend Office / Shorebase Rig* * Rig locations are as of December 14,

6 OPERATIONS ATWOOD HUNTER Cairo Kuala Lumpur Singapore ATWOOD BEACON VICKSBURG SEAHAWK ATWOOD FALCON Jakarta NORTH RANKIN A GOODWYN A ATWOOD EAGLE Perth Melbourne 5

7 ATWOOD EAGLE THE ATWOOD EAGLE IS CURRENTLY WORKING OFF THE COAST OF AUSTRALIA. THE RIG HAS MULTI-WELL CONTRACTUAL COMMITMENTS WITH WOODSIDE ENERGY, LTD. ( WOODSIDE ) AND BHP BILLITON PETROLEUM WHICH SHOULD EXTEND TO JUNE/JULY UPON COMPLETION OF THESE COMMITMENTS, THE RIG HAS A ONE (1) WELL CONTRACT COMMITMENT WITH ENI AUSTRALIA BV FOLLOWED BY A ONE (1) YEAR CONTRACT EXTENSION WITH WOODSIDE. ATWOOD HUNTER SINCE THE COMPLETION OF THE ATWOOD HUNTER S UPGRADE AT THE END OF CALENDAR 2001, THE RIG HAS WORKED OFF THE COAST OF EGYPT. THE RIG S CURRENT CONTRACT SHOULD BE COMPLETED MARCH/APRIL IMMEDIATELY UPON COMPLETION OF THE RIG'S CURRENT CONTRACT, IT WILL COMMENCE A TWO (2) YEAR CONTRACTUAL COMMITMENT WITH WOODSIDE ENERGY LTD. 6

8 ATWOOD BEACON THE ATWOOD BEACON IS CURRENTLY WORKING OFF THE COAST OF VIETNAM. THE RIG S CURRENT CONTRACTUAL COMMITMENT COULD EXTEND INTO THE FOURTH QUARTER OF FISCAL YEAR UPON COMPLETION OF ITS CURRENT CONTRACT, THE RIG WILL BE RELOCATED TO INDIA TO COMMENCE WORKING UNDER A TWENTY-FIVE (25) MONTH CONTRACT FOR GUJARAT STATE PETROLEUM CORPORATION LTD. 7

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 ****************************** $ 176,156 $163,454 $144,765 $149,157 $147,541 Contract drilling costs ******************* (102,849) (98,936) (98,500) (75,088) (70,014) General and administrative expenses ****** (14,245) (11,389) (14,015) (10,080) (9,250) Depreciation**************************** (26,735) (31,582) (25,758) (23,882) (25,579) OPERATING INCOME ******************* 32,327 21,547 6,492 40,107 42,698 Other expense ************************** (6,719) (9,145) (4,856) (1,330) (1,577) Tax (provision) benefit ******************* 403 (4,815) (14,438) (10,492) (13,775) NET INCOME (LOSS)**************** $ 26,011 $ 7,587 $ (12,802) $ 28,285 $ 27,346 PER SHARE DATA: Earnings (loss) per common share: Basic ******************************** $ 1.71 $ 0.55 $ (0.92) $ 2.04 $ 1.98 Diluted ****************************** $ 1.67 $ 0.54 $ (0.92) $ 2.02 $ 1.96 Average common shares outstanding: Basic ******************************** 15,206 13,859 13,846 13,839 13,828 Diluted ****************************** 15,610 14,032 13,846 13,994 13,978 FLEET DATA: Number of rigs owned or managed, at end of period(1)*************************** Utilization rate for in-service rigs(2)******** 98% 93% 92% 86% 83% BALANCE SHEET DATA: Cash and cash equivalents *************** $ 18,982 $ 16,416 $ 21,551 $ 27,655 $ 12,621 Working capital ************************* 35,894 32,913 26,063 43,735 25,057 Net property and equipment************** 390, , , , ,254 Total assets **************************** 495, , , , ,878 Total long-term debt (including current portion) ****************************** 90, , , ,000 60,000 Shareholders equity(3)(4) **************** 362, , , , ,636 Ratio of current assets to current liabilities Notes (1) Subsequent to the end of our 2005 fiscal year, in October 2005, we sold the SEASCOUT, reducing the total number of rigs owned or managed rigs to ten. (2) Excludes managed rigs, the SEASCOUT, and contractual downtime on rigs upgraded. (3) We have never paid any cash dividends on our common stock. (4) In October 2004, we sold 1,175,000 shares of common stock in a public offering. 8

10 OFFSHORE DRILLING OPERATIONS Maximum Percentage Year Water of 2005 Rig Name Upgraded Depth Revenues Location Customer Contract Status at December 13, 2005 SEMISUBMERSIBLES ATWOOD EAGLE 2000/2002 5,000 Ft. 20% Offshore WOODSIDE The rig continues to work under a drilling program for Woodside. Upon Australia ENERGY, LTD. completion of its current well for Woodside, the rig has current ( WOODSIDE ) commitments to drill (3) additional wells for Woodside and nine (9) firm wells plus five (5) option wells for BHP Billiton Petroleum. Upon completion of these commitments (estimated June/July 2007), the rig has a one (1) well contract commitment with ENI Australia BV and a one (1) year contract extension with Woodside. ATWOOD HUNTER 1997/2001 5,000 Ft. 12% Offshore BURULLUS GAS The rig is currently drilling the first of two (2) wells for Burullus which are Egypt CO. ( BURULLUS ) expected to be completed in March/April Upon completion of the current drilling program, the rig will commence working under a two (2) year contract for Woodside. ATWOOD FALCON ,700 Ft. 17% Offshore SARAWAK SHELL In December 2005, the rig commenced a 3 1 /2 year commitment with Shell. Malaysia BERHAD Commencing in July 2006, the rig is scheduled to undergo an upgrade of ( SHELL ) which $24 million of the cost will be funded by Shell. ATWOOD SOUTHERN CROSS ,000 Ft. 6% Upgrade ENI Spa AGIP The rig is currently in a shipyard undergoing required inspections, Italian Project At a EXPLORATION & certifications and equipment upgrades prior to drilling two firm wells for Malta PRODUCTION AGIP offshore Italy. Upon completion of the AGIP contract, the rig will be Shipyard DIVISION ( AGIP ) moved to the Black Sea to commence a drilling program for Melrose Resources. CANTILEVER JACK-UPS ATWOOD BEACON Constructed 400 Ft. 14% Offshore HOANG LONG The rig is currently working under a drilling program for Hoang Long in 2003 Vietnam AND HOAN VU which includes the drilling of six (6) firm wells. The drilling of the six JOINT OPERATING (6) firm wells is expected to take until July/August 2006 to complete. COMPANIES Immediately upon completion of its current contract, the rig will be moved ( HOANG LONG ) to India to commence a twenty-five (25) month contract for Gujarat State Petroleum Corporation Ltd. VICKSBURG Ft. 13% Offshore TOTAL The rig has commenced a two (2) firm well plus one (1) option well Myanmar EXPLORATION drilling program for Total offshore Myanmar. Including moving time and AND PRODUCTION assuming that the option is drilled, the Total drilling program could extend MYANMAR approximately 80 to 100 days. Immediately upon completion of its current ( TOTAL ) contract, the rig will return to Malaysia to work for Petrofac (Malaysia- PM304), Ltd. under a drilling program that could extend into the fourth quarter of fiscal year The rig will then be moved to Cambodia to work under an eight (8) month drilling program for Chevron Overseas Petroleum (Cambodia) Limited. SUBMERSIBLE RICHMOND 2000/ Ft. 7% U.S. Gulf of HELIS OIL & GAS The rig is currently drilling the tenth well under the Helis contract. Upon Mexico ( HELIS ) completion of this well, the rig will have four (4) additional wells to drill for Helis. The current drilling program is expected to keep the rig employed until April

11 Maximum Percentage Year Water of 2005 Rig Name Upgraded Depth Revenues Location Customer Contract Status at December 13, 2005 SEMISUBMERSIBLE TENDER ASSIST UNIT SEAHAWK 1992/ Ft. 8% Offshore SHELL The rig is currently working offshore Malaysia for Shell under a contract Malaysia that should extend until early March 2006, at which time the rig will be moved to a shipyard to undergo an upgrade. Following completion of the shipyard work (approximately 2 1 /2 months) the rig will be relocated to offshore West Africa to commence a 730 day contract with four options of 180 days each with Amerada Hess Equatorial Guinea, Inc. MODULAR PLATFORMS MANAGEMENT CONTRACT GOODWYN A and NORTH N/A 3% Australia WOODSIDE The Company is currently assisting Woodside in preparing the NORTH RANKIN A RANKIN A for recommencing drilling activities in early calendar year The GOODWYN A continues with an indefinite planned break in drilling activity, with the Company involved in rig maintenance. 10

12 SECURITIES LITIGATION SAFE HARBOR STATEMENT ) the extent to which customers and poten- tial customers continue to pursue deep- water drilling; 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. ) 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; Important factors that could cause our actual results of operations or our actual financial conditions to differ include, but are not necessa- rily limited to: ) the availability of adequate insurance at a reasonable cost; ) our dependence on the oil and gas ) the occurrence of an uninsured loss; industry; ) the risks of international operations, in- cluding possible economic, political, social ) the operational risks involved in drilling or monetary instability, and compliance for oil and gas; with foreign laws; ) compliance with or breach of environmen- tal laws; ) 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; 11 ) the effect public health concerns could have on our international operations and financial results; ) the incurrence of secured debt or addi- tional 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

13 planned maintenance expenditures due to presently unanticipated rig downtime; ) higher than anticipated accruals for performance-based compensation due to bet- ter than anticipated performance by us, higher than anticipated severance 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; ) 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 ) the actions of our competitors in the of our forward-looking statements. Other unoffshore drilling industry, which could known or unpredictable factors could also have significantly influence rig dayrates and material adverse effects on future results. The utilization; words believe, impact, intend, esti- mate, anticipate, plan and similar expres- ) changes in the geographic areas in which sions identify forward-looking statements. These our customers plan to operate, which in forward-looking statements are found at various turn could change our expected effective places throughout this report. When considering tax rate; any forward-looking statement, you should also keep in mind the risk factors described in our ) changes in oil and gas drilling technology Form 10-K for the year ended September 30, or in our competitors drilling rig fleets 2005, particularly in Item 1A Risk Factors, and in that could make our drilling rigs less other reports or filings we make with the SEC competitive or require major capital infrom time to time. Undue reliance should not be vestments to keep them competitive; placed on these forward-looking statements, ) rig availability; which are applicable only on the date hereof. Neither we nor our representatives have a ) the effects and uncertainties of legal and general obligation to revise or update these administrative proceedings and other forward-looking statements to reflect events or contingencies; circumstances that arise after the date hereof or to reflect the occurrence of unanticipated events. ) the impact of governmental laws and regulations and the uncertainties involved in their administration, particularly in some foreign jurisdictions; 12

14 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENT drilling program that is expected to be completed in March or early April Immediately Subsequent to filing our Form 8-K on Deupon the rig completing its current drilling cember 2, 2005 announcing our earnings for the program, it will commence a two year drilling fourth quarter of the fiscal year 2005 and the program at dayrates of $240,000 to $245,000. The year ended September 30, 2005 of $1.70 per ATWOOD EAGLE has contractual commitments diluted share and $.45 per diluted share respecoffshore Australia at dayrates ranging from tively, we received additional information con- $150,000 to $420,000 (except for a one-well cerning deferred taxes in Australia which commitment remaining at a dayrate of $89,000) resulted in an increase in the deferred tax that could extend into the fourth quarter of fiscal provision for the quarter and year ended Sepyear The ATWOOD FALCON has a contember 30, 2005 of approximately $360,000 or tractual commitment offshore Malaysia at $0.03 per share. This additional deferred tax dayrates ranging from $93,000 to $200,000 which provision reduced basic and diluted earnings per could extend through the first half of fiscal year share for the fourth quarter of fiscal year 2005 to This contractual commitment requires the $.44 and $.42, respectively and for fiscal year rig to undergo an upgrade to extend its water 2005 to $1.71 and $1.67, respectively. depth drilling capabilities from 3,700 feet to OUTLOOK 5,000 feet. The customer will pay $24 million of the cost of the upgrade along with payment of a Current effective utilization of worldwide $90,000 dayrate during the upgrade period. The offshore drilling equipment is over 97%. All of ATWOOD SOUTHERN CROSS is currently in a our eight drilling units have contractual dayrate shipyard in Malta undergoing an approximate commitments that are the highest in their $7 million equipment upgrade, which is ex- respective histories. Currently, we have approxi- pected to be completed in early January mately 90% and 70% of our available rig days Following this upgrade, the rig has drilling contracted for fiscal years 2006 and 2007, respecto commitments at dayrates ranging from $70,000 tively. A comparison of the average per day $125,000 that should extend to the end of revenues for fiscal year 2005 for each of our eight fiscal year Currently, the ATWOOD BEA- drilling units to their current highest contracted CON is working offshore Vietnam at dayrates dayrate commitment is as follows: ranging from $62,400 to $77,000 on a drilling Average Current program that could extend into the fourth quar- Per Day Highest ter of fiscal year Immediately upon comple- Revenues Contracted tion of its current drilling program, the rig will for Fiscal Dayrate Percentage Year 2005 Commitment Change be relocated to India to commence a 25-month contract at dayrates ranging from $113,000 to ATWOOD HUNTER ***** $61,000 $245, % ATWOOD EAGLE******* 95, , % $133,500. The VICKSBURG has contract commit- ATWOOD FALCON ***** 82, , % ments offshore Southeast Asia at dayrates rang- ATWOOD SOUTHERN ing from $82,000 to $94,500 that should extend CROSS ************** 42, , % into the third quarter of fiscal year The ATWOOD BEACON ***** 66, , % SEAHAWK, with a current dayrate of $50,000, is VICKSBURG *********** 65,000 94,500 45% scheduled to enter a shipyard in Southeast Asia SEAHAWK************* 45,000 68,430 52% during the second quarter of fiscal year 2006 to RICHMOND************ 33,000 45,000 36% undergo a $16 million upgrade. Following the The ATWOOD HUNTER is currently working upgrade, the rig will be relocated to offshore offshore Egypt at a dayrate of $125,000 on a West Africa to commence a 730 day (plus four 13

15 six-month options) drilling program at a dayrate prior fiscal year. The increase in revenues for the of $68,430. The rig could be off dayrate for ATWOOD FALCON was due to the rig being approximately five months while undergoing the fully utilized during fiscal year 2005 at an upgrade and relocation to offshore Africa. Our average dayrate of $82,000 compared to 90% only rig in the U.S. Gulf of Mexico, the RICH- utilization at an average dayrate of $78,000 MOND, has a current contract commitment at during fiscal year The ATWOOD BEACON dayrates ranging from $39,500 to $45,000 which had average per day revenues during fiscal year could extend to the end of the third quarter of 2005 of $66,000 (which includes 100 days of fiscal year business interruption proceeds) compared to average per day revenues during fiscal year 2004 With the current strong market environment of $62,000 (which includes 35 days of business supporting high equipment utilization and historinterruption proceeds and 30 days of zero rate ical high dayrates for all of our eight drilling downtime immediately following its July 2004 units, we expect significantly improved cash incident which damaged its legs and derrick). flows and operating results in fiscal year 2006 Refer to Note 3 to the consolidated financial compared to fiscal year Our current total statements for further discussion of the Atwood debt to capitalization ratio [debt/(debt + equity)] Beacon incident. Since the end of fiscal year is 20%. This ratio will continue to decline until 2001, there has been a planned break in drilling we identify an acceptable growth opportunity. activities on the GOODWYN A and NORTH RESULTS OF OPERATIONS RANKIN A platform rigs during which we have provided a limited amount of maintenance ser- Fiscal Year 2005 Versus Fiscal Year 2004 vices to these platform rigs. However, during Revenues for the current fiscal year infiscal year 2005, service activities for NORTH creased 8% compared to the prior fiscal year. A RANKIN A increased due to a planned drilling comparative analysis of revenues by rig for fiscal program to commence during fiscal year years 2005 and 2004 is as follows: The ATWOOD HUNTER was fully utilized during fiscal year 2005 at an average dayrate of $61,000 REVENUES (In millions) compared to 95% utilization during the prior Fiscal Fiscal fiscal year at an average dayrate of $55,000. The Variance increase in revenue for the RICHMOND was due ATWOOD EAGLE ********** $ 34.6 $ 30.4 $ 4.2 to an increase in the average dayrate from ATWOOD FALCON********* $26,000 during fiscal year 2004 to $33,000 during ATWOOD BEACON ******** fiscal year Revenues for the VICKSBURG GOODWYN A /NORTH were relatively consistent for the current and RANKIN A ************* prior fiscal years while revenues for the ATWOOD HUNTER ******** RICHMOND *************** ATWOOD SOUTHERN CROSS declined due to a VICKSBURG*************** (0.7) decrease in the amount of earned mobilization ATWOOD SOUTHERN revenue from $4.1 million in fiscal year 2004 to CROSS ***************** (1.7) $0.8 million in fiscal year 2005 as the rig SEAHAWK **************** (4.7) relocated twice in the prior fiscal year and only $176.1 $163.5 $12.6 once during the current fiscal year. This decrease was partially offset by an increase in During fiscal year 2005, the ATWOOD EA- dayrates ranging from $35,000 to $40,000 during GLE was fully utilized at dayrates ranging from fiscal year 2005 compared to $30,000 to $35,000 $89,000 to $109,000 compared to approximately during fiscal year The SEAHAWK was fully 90% utilization at the same dayrates during the 14

16 utilized during the fiscal year 2004 at an average BEACON was due to a decrease in repair and dayrate of $50,000 compared to 85% utilization maintenance expenses primarily resulting from during fiscal year 2005 at an average dayrate of the recording of a $1.0 million insurance deducti- $45,000. ble during fiscal year 2004 related to damage incurred during the rig s July 2004 incident. Contract drilling costs for the current fiscal During most of the fourth quarter of fiscal year year increased 4% compared to the prior fiscal 2005, the ATWOOD SOUTHERN CROSS was year. A comparative analysis of contract drilling being mobilized from Southeast Asia to the costs by rig for fiscal years 2005 and 2004 is as Mediterranean. Virtually all costs incurred during follows: a mobilization period are deferred and amortized CONTRACT DRILLING as an expense over the term of the new COSTS (In millions) contract. Having deferred mobilization costs at Fiscal Fiscal the end of fiscal year 2005 compared to having Variance no such deferred costs at the end of fiscal year GOODWYN A /NORTH 2005 accounts for its decline in drilling costs. RANKIN A ************* $ 4.7 $ 2.1 $ 2.6 The increase of other drilling costs during the ATWOOD EAGLE ********** current fiscal year was due to a $1.0 million RICHMOND *************** reduction in the amount of insurance premium SEAHAWK **************** VICKSBURG *************** refunds received during fiscal year 2005 when ATWOOD HUNTER ********* (0.1) compared to fiscal year 2004 and due to the prior ATWOOD FALCON ********* (0.5) fiscal year including the settlement of a dispute ATWOOD BEACON********* (1.7) with a client which resulted in a reduction of ATWOOD SOUTHERN operation costs of $0.6 million along with various CROSS****************** (3.2) OTHER ******************* other increases of non drilling unit specific costs. $102.8 $98.9 $ 3.9 Depreciation expense for the current fiscal year decreased 16% as compared to the prior With the increase in service activities for fiscal year. A comparative analysis of deprecia- NORTH RANKIN A during fiscal year 2005 due tion expense by rig for fiscal years 2005 and to a planned drilling program to commence 2004 is as follows: during fiscal year 2006, drilling costs as well as DEPRECIATION revenues increased from our management of this EXPENSE (In millions) platform rig. The increase in drilling costs for the Fiscal Fiscal ATWOOD EAGLE was due to higher labor costs Variance due to local operating requirements offshore ATWOOD SOUTHERN CROSS ** $ 4.5 $ 4.2 $ 0.3 Australia, its location for all of the fiscal year VICKSBURG****************** The increase in drilling costs for the ATWOOD FALCON************ RICHMOND and SEAHAWK were primarily due ATWOOD BEACON *********** to higher repair and maintenance expenses RICHMOND ****************** incurred on the rigs during the fiscal year ended ATWOOD EAGLE ************* (0.1) September 30, 2005 compared to the fiscal year ATWOOD HUNTER *********** (0.1) ended September 30, Drilling costs for the SEAHAWK ******************* (4.6) OTHER ********************** (0.6) VICKSBURG, ATWOOD HUNTER, and ATWOOD FALCON remained relatively consistent for the $26.7 $31.6 $(4.9) fiscal year 2005 compared to the prior fiscal year. The decline in drilling costs for the ATWOOD 15

17 Effective October 1, 2004, we extended the notification from the United States Department of remaining depreciable life of the SEAHAWK from Treasury that a previously reserved United States 2 months to 5 years. The depreciable life of this income tax refund we had been pursuing for rig was extended based upon entry into a over two years has been approved for payment. contract that extended the rig s commercial Based upon this approval, we reduced our viability for up to 5 years, coupled with our income tax provision by the refund amount of intent to continue marketing and operating the $3.3 million for the year ended September 30, rig beyond 2 months. The decrease in other Furthermore, during fiscal year 2005, operdepreciation is due to certain non-rig assets ating income earned in certain nontaxable and becoming fully depreciated during the last quar- deemed profit tax jurisdictions was higher when ter of the prior fiscal year and the first quarter of compared to the prior fiscal year, including fiscal year Depreciation expense for our business interruption proceeds earned by the other units was relatively unchanged in fiscal ATWOOD BEACON in a zero tax jurisdiction for year 2005 as compared to fiscal year approximately three and a half months, which contributed to our lower effective tax rate. As a General and administrative expenses for result of these items, our effective tax rate for fiscal year 2005 have increased 25% compared to fiscal year 2005 was significantly less when the prior fiscal year due to significantly increased compared to the prior fiscal year and the United professional fees primarily resulting from compli- States statutory rate. ance requirements of the Sarbanes-Oxley Act and due to $0.7 million of bonuses paid during the fiscal year 2005 compared no bonus payments Fiscal Year 2004 Versus Fiscal Year 2003 during fiscal year Although the level Revenues for the 2004 fiscal year increased of our outstanding debt has been reduced 13% compared to fiscal year A comparative significantly from the prior fiscal year, the reduc- analysis of revenues by rig for fiscal years 2004 tion of interest expense was partially offset by and 2003 is as follows: rising interest rates during fiscal year REVENUES Interest income has increased when compared to (In millions) the prior fiscal year due to higher interest rates Fiscal Fiscal earned on cash balances and interest income Variance earned on income tax refunds. ATWOOD BEACON ********* $ 20.7 $ 3.0 $17.7 ATWOOD EAGLE *********** Virtually all of our tax provision for fiscal ATWOOD HUNTER ********* years 2005 and 2004 relates to taxes in foreign RICHMOND **************** jurisdictions, with fiscal year 2005 also impacted GOODWYN A /NORTH by a $3.3 million United States tax benefit RANKIN A ************** recognized. During the current fiscal year our VICKSBURG **************** (0.7) provision was also offset by two other foreign ATWOOD SOUTHERN CROSS (2.0) discrete items. During the first quarter of fiscal SEAHAWK ***************** (4.2) year 2005, we received a $1.7 million tax refund ATWOOD FALCON********** (6.4) in Malaysia related to a previously reserved tax receivable. In addition, a $1.0 million deferred $163.5 $144.8 $18.7 tax benefit was recognized in June 2005 due to The ATWOOD BEACON was available for the filing and subsequent acceptance by the operations during the fiscal year 2004 period up local tax authority, of amended prior year tax to its July accident compared to only two returns. On December 1, 2005, we received months in the prior fiscal year while it was 16

18 under construction. The increase in revenue for pared to being fully utilized during fiscal year the ATWOOD EAGLE was due to higher dayrates earned during fiscal year 2004 of approximately $90,000 to $110,000 compared to In total, contract drilling costs for the 2004 fiscal year 2003 dayrate of approximately $85,000 fiscal year were comparable to the prior fiscal and to higher utilization in the current fiscal year year. A comparative analysis of contract drilling as the rig was undergoing its upgrade and costs by rig for fiscal years 2004 and 2003 is as relocating to offshore West Africa during the first follows: five months of the prior fiscal year. The increase CONTRACT in revenue for the ATWOOD HUNTER and the DRILLING COSTS RICHMOND was due to higher average dayrates (In millions) Fiscal Fiscal earned during the 2004 fiscal year of $57,000 and Variance $27,000, respectively as compared to the prior fiscal year average dayrates of $54,000 and ATWOOD BEACON *********** $10.2 $ 1.4 $ 8.8 ATWOOD EAGLE ************* $23,000, respectively. The ATWOOD HUNTER GOODWYN A /NORTH was also utilized for approximately 20 more days RANKIN A **************** during fiscal year 2004 as compared to fiscal year RICHMOND ****************** (0.3) Since the end of fiscal year 2001, there has SEAHAWK ******************* (0.7) been a planned break in drilling activities on the ATWOOD HUNTER *********** (0.9) GOODWYN A and NORTH RANKIN A plat- VICKSBURG****************** (1.0) form rigs. We provided a limited amount of ATWOOD SOUTHERN CROSS ** (2.0) ATWOOD FALCON************ (3.6) maintenance services to these platform rigs OTHER ********************** (1.3) during this planned idle period. The VICKSBURG $98.9 $98.5 $ 0.4 had average per day revenues of $66,000 during fiscal year 2004 compared to $68,500 during fiscal year The decrease in revenue for the The ATWOOD BEACON incurred operating ATWOOD SOUTHERN CROSS was due to lower costs for all of fiscal year 2004 compared to only dayrates earned in the current fiscal year of two months in the prior fiscal year, as the rig $30,000 to $35,000 compared to the prior fiscal was under construction for most of fiscal year year of $45,000 to $60,000. The impact of lower The recording of a $1 million insurance dayrates during fiscal year 2004 was partially deductible resulting from the damage incurred offset by higher utilization of the rig during fiscal by the ATWOOD BEACON in its July 2004 year 2004 of 83% compared to 70% during fiscal incident also contributed to an increase in costs. year During the first quarter of the 2004 The increase in daily operating costs of the fiscal year, the amortization of deferred revenue ATWOOD EAGLE from $53,200 in fiscal year related to the 1999 client reimbursement of the 2003 to $56,700 in fiscal year 2004 was primarily upgrade costs for the SEAHAWK was completed, due to an increase in labor costs. Since drilling leading to the decrease in revenue for this rig. activities were suspended on the GOODWYN A The decrease in revenue for the ATWOOD and NORTH RANKIN A platforms at the end of FALCON was primarily due to lower dayrates fiscal year 2001, we provided a limited level of earned during the 2004 fiscal year of $70,000 to maintenance services to these rigs in fiscal years $85,000 compared to $75,000 to $110,000 in the 2004 and Decreases in operating costs for prior fiscal year and also due to the rig being the RICHMOND, SEAHAWK and ATWOOD idle during July 2004 while undergoing a HUNTER were due to declines in maintenance quarters upgrade and planned maintenance comthe related costs. The decrease in drilling costs for VICKSBURG was due to the temporary 17

19 suspension of its contract with ExxonMobil Depreciation expense for the 2004 fiscal year during the 2004 fiscal year (the contract resumed decreased 16% as compared to the prior fiscal during the first quarter of fiscal year 2005), year. A comparative analysis of depreciation which in turn, suspended the amortization of expense by rig for fiscal years 2004 and 2003 is expenses related to contract specific rig improve- as follows: ment costs incurred for this specific contract. In DEPRECIATION addition, agent fees were lower compared to EXPENSE (In millions) prior fiscal year as the VICKSBURG did not incur Fiscal Fiscal any agent fees while working in Thailand during Variance the second half of fiscal year During fiscal ATWOOD BEACON********** $ 5.2 $ 0.7 $ , the ATWOOD SOUTHERN CROSS worked ATWOOD EAGLE *********** offshore India and Malaysia where daily operat- SEAHAWK ***************** ing costs are lower than offshore Italy, its ATWOOD SOUTHERN CROSS primary operating area in fiscal year The VICKSBURG **************** decrease in drilling costs for the ATWOOD ATWOOD FALCON ********** FALCON was due to the rig operating offshore ATWOOD HUNTER ********** RICHMOND **************** (1.0) Australia for seven months of fiscal year 2003 at OTHER ******************** (0.2) an approximate $25,000 per day higher operating $31.6 $25.8 $ 5.8 costs compared to offshore Asia, its location for all of fiscal year The higher operating costs resulted from Australian labor regulations requir- The increase in depreciation expense for the ing that marine union personnel must be emdepreciation ATWOOD BEACON was due to a full year of ployed for all offshore vessels that have expense during fiscal year 2004 propulsion. During the period that the ATWOOD compared to only two months in fiscal year 2003 FALCON worked offshore Australia, it was as the rig was under construction for most of the equipped with propulsion assist, which required 2003 fiscal year. The increase in depreciation the employment of marine personnel that was expense for the ATWOOD EAGLE was also due not required when the rig worked offshore Asia. to a full year of depreciation expense during the 2004 fiscal year compared to only seven months in the prior fiscal year as the rig was being upgraded during the first five months of fiscal year During the period when a rig is out of service for a significant upgrade that extends its useful life, no depreciation is recognized. Depreciation expense for the SEAHAWK, ATWOOD SOUTHERN CROSS, VICKSBURG, ATWOOD FALCON AND ATWOOD HUNTER was relatively unchanged in fiscal year 2004 as compared to fiscal year The decrease in depreciation expense for the RICHMOND was due to extending its remaining useful life from 2 to 5 years effective October 1, The depreciable life of this rig was extended based upon an assessment of its commercial viability, coupled with our intent to continue marketing and operating the rig beyond 2 years. 18

20 General and administrative expense de- Virtually all of our tax provision for fiscal creased 19% in fiscal year 2004 compared to year 2004 related to taxes in foreign jurisdictions. fiscal year 2003 primarily due to a reduction in The $9.6 million decrease in provision for income professional fees related to our worldwide re- taxes in fiscal year 2004 compared to fiscal year structuring initiative incurred in the prior fiscal 2003 was primarily due to the recording of a year. Our worldwide group of consolidated enti- $4.7 million deferred foreign tax liability in fiscal ties derives substantially all of their operating year 2003 relating to Australian and Malaysian revenues from international offshore drilling of taxes after reassessing certain tax planning exploratory and developmental oil and gas wells strategies in conjunction with the reorganization and related support services. At the beginning of of our foreign subsidiaries undertaken in fiscal fiscal year 2003, we initiated a restructuring of year 2003 and a reduction of $2.1 million in our foreign subsidiaries and deployment of our current foreign tax provisions in fiscal year 2004 worldwide assets to (i) focus potential civil compared to fiscal year 2003 primarily due to tax litigation which may arise from future offshore efficiencies resulting from the fiscal year 2003 activities in foreign operations in the jurisdic- reorganization. tions of the areas of those operations, (ii) simplify our worldwide organizational struc- LIQUIDITY AND CAPITAL RESOURCES ture for administrative and marketing reasons, (iii) facilitate more efficient management and Presently, we own and operate a premium, control of business operations, and (iv) deploy modern fleet of eight mobile offshore drilling our worldwide assets and capital in a more units as well as manage the operations of two efficient manner among our consolidated group operator-owned platform drilling units located in of companies. In addition to these operational Northwest Australia. During fiscal year 1997 efficiencies, it is expected that this restructuring through 2003, we expended approximately will also provide long-term tax efficiencies. A $340 million on upgrading seven existing drilling significant part of this restructuring involved the units and approximately $120 million on con- contribution of a majority of our structing an ultra-premium jack-up unit. After non-u.s. operations to Atwood Oceanics Pacific expending approximately $100 million in each of Limited, a wholly-owned Cayman Islands comand fiscal years 2001, 2002 and 2003 on our upgrades pany, which had historically served as our rig construction programs, our capital ex- offshore company for marketing, negotiating, and penditures declined to approximately $6.5 million performing drilling contracts outside of the in fiscal year 2004 and $9.8 million (net of United States. At September 30, 2003, most of insurance reimbursement relating to ATWOOD our planned restructuring initiative had been BEACON repairs) in fiscal year With the completed, with approximately $3 million of the scheduled upgrades of the ATWOOD FALCON, increase in general and administrative expenses SEAHAWK and ATWOOD SOUTHERN CROSS related to professional fees associated with this during fiscal year 2006, we currently expect our restructuring process. capital expenditures during fiscal year 2006 to range between $60 and $65 million. Since we The $4.2 million increase in net interest operate in a very cyclical industry, maintaining expense was due to having no capitalized high equipment utilization in up, as well as interest in fiscal year 2004 compared to $4.2 mil- down, cycles is a key factor in generating cash lion of capitalized interest in fiscal year 2003 as a to satisfy current and future obligations. For result of the completion of the upgrade program fiscal years 2000 through 2004, net cash provided and construction of the ATWOOD BEACON by operating activities ranged from a low of during fiscal year approximately $13.7 million in fiscal year 2003 to 19

21 a high of approximately $62.3 million in fiscal rowing capacity under the revolving portion of year 2001 compared to net cash provided by our Credit Facility. We are in compliance with all operating activities of approximately $41.1 mil- financial covenants at September 30, 2005 and lion for fiscal year Our operating cash flows expect to remain in compliance with all financial are primarily driven by our operating income, covenants during fiscal year Further, at all which reflects dayrates and rig utilization. The times during fiscal year 2003, 2004 and 2005 low level of net cash provided by operating when we were required to determine compliance activities in fiscal year 2003 was due to a with our financial covenants, we were in complidownturn in market conditions during which we ance with those covenants. Aside from the pursued short-term contract opportunities in financial covenants, no other provisions exist in high operating cost areas in order to maintain the Credit Facility that could result in accelerahigh utilization of our fleet. Market conditions tion of the April 1, 2008 maturity date. improved in fiscal years 2004 and 2005 which enabled us to have higher cash flows and At September 30, 2005, the collateral for our earnings in these years compared to fiscal year Credit Facility consists primarily of preferred Due to the significant increase in future mortgages on all eight of our active drilling units dayrate commitments at historically high levels, (with an aggregate net book value at Septem- we have pursued longer-term contract opportuniber 30, 2005 totaling approximately $380 million). ties for some of our drilling units. We currently We are not required to maintain compensating have approximately 90% and 70% of our availaof approximately 0.70% per annum on the un- balances; however, we are required to pay a fee ble operating rig days committed for fiscal years 2006 and 2007, respectively. With the current used portion of the revolving loan facility and historical high dayrate commitments on all eight certain other administrative costs. of our drilling units, we anticipate significant In October 2005, we sold our semisubmerimprovement in cash flows and earnings during sible hull, SEASCOUT, for $10 million (net after fiscal years 2006 and Other than our certain expenses) and our spare 15,000 P.S.I. expected capital expenditures of $60 million to BOP Stack for approximately $15 million. The $65 million for fiscal year 2006, the only addi- gain on the sale of these assets of approximately tional cash commitment for fiscal year 2006, $9 million will be recorded in the first quarter of outside of funding current rig operations, is our fiscal year The $25 million in cash from required quarterly repayments under the term these sales has increased our current cash and portion of our senior secured Credit Facility cash equivalents on hand to approximately which will total $36 million for fiscal year $40 million as of November 30, We expect to generate more than sufficient cash flows from operations to satisfy these obligations. Our portfolio of accounts receivable is com- prised of major international corporate entities In October 2004, we sold in a public offering with stable payment experience. Historically, we 1,175,000 shares of our common stock at an have not encountered significant difficulty in effective net price (before expenses) of $45.83 for collecting receivables and typically do not renet proceeds of approximately $53.6 million. We quire collateral for our receivables. The insurance used these proceeds and cash on hand to repay receivable of $0.6 million at September 30, 2005 the $55 million outstanding under the revolving relates to repairs to be made to the ATWOOD portion of our Credit Facility. As of Septem- BEACON. During fiscal year 2006, we plan to ber 30, 2005, we only have $90 million outstand- complete the remaining work to restore the rig ing under the term portion of our Credit Facility, to its pre-incident condition at which time we with approximately $99 million of available bor- expect to collect the remaining $0.6 million 20

22 insurance receivable associated therewith. We have a $0.2 million allowance for doubtful accounts at September 30, 2005 due to a delinquent account with one specific client. COMMITMENTS of the underlying drilling or management con- tract. 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 Fiscal 2006 Fiscal 2007 Fiscal 2008 recognized on a per day basis as the work progresses. In addition, lump-sum fees received as compensation for the cost of relocating drilling rigs from one major operating area to $37,232 $36,863 $18,175 another at commencement of the drilling contract are recognized as earned on a straight-line The following table summarizes our obligations and commitments (in thousands) at Sep- tember 30, 2005: Long-Term Debt ******** $36,000 $36,000 $18,000 Operating Leases ******* 1, 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 termina- tion occurs. In addition, we defer the mobiliza- tion costs relating to moving a drilling rig to a new area and amortize such costs on a straightline basis over the life of the applicable drilling contract as well. 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 $90 million which currently bears interest at a rate of approximately 5.25%. 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 as- sumptions 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 man- agement regarding estimates about matters that are inherently uncertain. Our most critical ac- counting 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 21 We currently operate eight active offshore drilling units. These assets are premium equipment and should provide many years of quality service. At September 30, 2005, the carrying value of our property and equipment totaled $390.8 million, which represents 79% of our total assets. This carrying value reflects the applica- tion of our property and equipment accounting policies, which incorporate estimates, assump- tions 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