Report of Foreign Issuer (6-k)

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Report of Foreign Issuer (6-k)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 6-K


REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March   31, 2019 

Commission File Number 001-35345


PACIFIC DRILLING S.A.


8-10, Avenue de la Gare

L-1610 Luxembourg

(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes  ☐            No   ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes  ☐            No   ☒

We hereby expressly incorporate by reference this report on Form 6-K into our Registration Statement on Form  F-3 filed with the SEC on March 12, 2019, Registration No. 333-230231 , and our Registration Statement on Form S-8 filed with the SEC on November 28, 2018, Registration No. 333-228582 .

 

 

 


 

PACIFIC DRILLING S.A.

TABLE OF CONTENTS

As used in this report on Form 6-K (this “Form 6-K”), unless the context otherwise requires, references to “Pacific Drilling,” the “Company,” “we,” “us,” “our” and words of similar import refer to Pacific Drilling S.A. and its subsidiaries. Unless otherwise indicated, all references to “U.S. $” and “$” in this report are to, and amounts are represented in, United States dollars.

The information and our unaudited condensed consolidated financial statements in this Form 6-K should be read in conjunction with our Annual Report on Form 20-F for the year ended December 31, 2018 (our “2018 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 12, 2019. We prepare our unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

 

1


 

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (Unaudited)

Unaudited Condensed Consolidated Financial Statements

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share information) (unaudited)

 

 

 

 

 

 

 

 

 

 

Successor

 

    

Predecessor

 

 

Three Months

 

 

Three Months

 

 

Ended March 31, 

 

 

Ended March 31, 

 

    

2019

    

    

2018

Revenues

 

 

 

 

 

 

 

Contract drilling

 

$

65,916

 

 

$

82,069

Costs and expenses

 

 

 

 

 

 

 

Operating expenses

 

 

(52,296)

 

 

 

(64,354)

General and administrative expenses

 

 

(11,246)

 

 

 

(17,204)

Depreciation and amortization expense

 

 

(58,899)

 

 

 

(69,920)

 

 

 

(122,441)

 

 

 

(151,478)

Operating loss

 

 

(56,525)

 

 

 

(69,409)

Other income (expense)

 

 

 

 

 

 

 

Interest expense

 

 

(24,039)

 

 

 

(14,929)

Reorganization items

 

 

(1,003)

 

 

 

(12,032)

Interest income

 

 

1,972

 

 

 

788

Equity earnings in unconsolidated subsidiaries

 

 

(1,052)

 

 

 

 —

Expenses to unconsolidated subsidiaries, net

 

 

(272)

 

 

 

 —

Other expense

 

 

(91)

 

 

 

(195)

Loss before income taxes

 

 

(81,010)

 

 

 

(95,777)

Income tax expense

 

 

(2,969)

 

 

 

(274)

Net loss

 

$

(83,979)

 

 

$

(96,051)

Loss per common share, basic

 

$

(1.12)

 

 

$

(4.50)

Weighted-average number of common shares, basic

 

 

75,031

 

 

 

21,339

Loss per common share, diluted

 

$

(1.12)

 

 

$

(4.50)

Weighted-average number of common shares, diluted

 

 

75,031

 

 

 

21,339

See accompanying notes to unaudited condensed consolidated financial statements.

2


 

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Three Months

 

 

Three Months

 

 

Ended March 31, 

 

 

Ended March 31, 

 

 

2019

    

    

2018

Net loss

 

$

(83,979)

 

 

$

(96,051)

Other comprehensive income:

 

 

 

 

 

 

 

Reclassification adjustment for loss on derivative instruments realized in net income

 

 

 —

 

 

 

193

Total other comprehensive income

 

 

 —

 

 

 

193

Total comprehensive loss

 

$

(83,979)

 

 

$

(95,858)

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except par value) (unaudited)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Assets:

 

 

 

    

 

 

Cash and cash equivalents

 

$

337,173

 

$

367,577

Restricted cash

 

 

16,965

 

 

21,498

Accounts receivable, net

 

 

46,895

 

 

40,549

Other receivable

 

 

28,000

 

 

28,000

Materials and supplies

 

 

40,598

 

 

40,429

Prepaid expenses and other current assets

 

 

16,390

 

 

9,149

Total current assets

 

 

486,021

 

 

507,202

Property and equipment, net

 

 

1,901,540

 

 

1,915,172

Receivable from unconsolidated subsidiaries

 

 

204,790

 

 

204,790

Intangible asset

 

 

53,025

 

 

85,053

Investment in unconsolidated subsidiaries

 

 

11,264

 

 

11,876

Other assets

 

 

29,630

 

 

24,120

Total assets

 

$

2,686,270

 

$

2,748,213

Liabilities and shareholders’ equity:

 

 

 

 

 

 

Accounts payable

 

$

13,072

 

$

14,941

Accrued expenses

 

 

17,716

 

 

25,744

Accrued interest

 

 

32,279

 

 

16,576

Deferred revenue, current

 

 

1,443

 

 

 —

Total current liabilities

 

 

64,510

 

 

57,261

Long-term debt

 

 

1,047,431

 

 

1,039,335

Payable to unconsolidated subsidiaries

 

 

4,381

 

 

4,400

Other long-term liabilities

 

 

34,228

 

 

28,259

Total liabilities

 

 

1,150,550

 

 

1,129,255

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common shares, $0.01 par value per share, 82,500 shares authorized and issued and 75,023 and 75,031 shares outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

750

 

 

750

Additional paid-in capital

 

 

1,646,557

 

 

1,645,692

Treasury shares, at cost

 

 

(124)

 

 

 —

Accumulated deficit

 

 

(111,463)

 

 

(27,484)

Total shareholders’ equity

 

 

1,535,720

 

 

1,618,958

Total liabilities and shareholders’ equity

 

$

2,686,270

 

$

2,748,213

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

Total

 

 

Common Shares

 

Paid-In

 

Treasury Shares

 

Comprehensive

 

Accumulated

 

Shareholders’

Successor

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Loss

    

Deficit

    

Equity

Balance at December 31, 2018

 

75,031

 

$

750

 

$

1,645,692

 

7,469

 

$

 —

 

$

 —

 

$

(27,484)

 

$

1,618,958

Shares repurchased

 

(8)

 

 

 —

 

 

 —

 

 8

 

 

(124)

 

 

 —

 

 

 —

 

 

(124)

Share-based compensation

 

 —

 

 

 —

 

 

865

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

865

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(83,979)

 

 

(83,979)

Balance at March 31, 2019

 

75,023

 

$

750

 

$

1,646,557

 

7,477

 

$

(124)

 

$

 —

 

$

(111,463)

 

$

1,535,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

Total

 

 

Common Shares

 

Paid-In

 

Treasury Shares

 

Comprehensive

 

Accumulated

 

Shareholders’

Predecessor

    

Shares

    

Amount

    

Capital

    

Shares

    

Amount

    

Loss

    

Deficit

    

Equity

Balance at December 31, 2017

 

21,339

 

$

213

 

$

2,366,464

 

1,212

 

$

 —

 

$

(14,493)

 

$

(200,383)

 

$

2,151,801

Share-based compensation

 

 —

 

 

 —

 

 

723

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

723

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

193

 

 

 —

 

 

193

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(96,051)

 

 

(96,051)

Balance at March 31, 2018

 

21,339

 

$

213

 

$

2,367,187

 

1,212

 

$

 —

 

$

(14,300)

 

$

(296,434)

 

$

2,056,666

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Three Months

 

 

Three Months

 

 

Ended March 31, 

 

 

Ended March 31, 

 

    

2019

    

    

2018

Cash flow from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(83,979)

 

 

$

(96,051)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

58,899

 

 

 

69,920

Amortization of deferred revenue

 

 

(570)

 

 

 

(6,150)

Amortization of deferred costs

 

 

433

 

 

 

5,007

Amortization of debt premium, net

 

 

(112)

 

 

 

 —

Interest paid-in-kind

 

 

8,208

 

 

 

 —

Deferred income taxes

 

 

2,765

 

 

 

(1,762)

Share-based compensation expense

 

 

865

 

 

 

723

Reorganization items

 

 

 —

 

 

 

4,707

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,346)

 

 

 

(8,284)

Materials and supplies

 

 

(169)

 

 

 

1,109

Prepaid expenses and other assets

 

 

(14,222)

 

 

 

4,451

Accounts payable and accrued expenses

 

 

16,130

 

 

 

(12,745)

Deferred revenue

 

 

2,013

 

 

 

(1,535)

Net cash used in operating activities

 

 

(16,085)

 

 

 

(40,610)

Cash flow from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(17,613)

 

 

 

(3,888)

Net cash used in investing activities

 

 

(17,613)

 

 

 

(3,888)

Cash flow from financing activities:

 

 

 

 

 

 

 

Payments for financing costs

 

 

(1,115)

 

 

 

 —

Purchases of treasury shares

 

 

(124)

 

 

 

 —

Net cash used in financing activities

 

 

(1,239)

 

 

 

 —

Net decrease in cash and cash equivalents

 

 

(34,937)

 

 

 

(44,498)

Cash, cash equivalents and restricted cash, beginning of period

 

 

389,075

 

 

 

317,448

Cash, cash equivalents and restricted cash, end of period

 

$

354,138

 

 

$

272,950

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes   to   Condensed   Consolidated   Financial   Statements (Unaudited)

Note 1 — Nature of Business

Pacific Drilling S.A. and its subsidiaries (“Pacific Drilling,” the “Company,” “we,” “us” or “our”) is an international offshore drilling contractor committed to being the preferred provider of offshore drilling services to the oil and natural gas industry through the use of high-specification floating rigs. Our primary business is to contract our fleet to drill wells for our clients.

Note 2 — Emergence from Bankruptcy Proceedings

By order entered on November 2, 2018, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) confirmed the Company’s Modified Fourth Amended Joint Plan of  Reorganization, dated October 31, 2018 (the “Plan”) that had been filed with the Bankruptcy Court in connection with the filing by the Company and certain of its subsidiaries (the “Initial Debtors”) of petitions (the “Bankruptcy Petitions”) on November 12, 2017 (the “Petition Date”) with the Bankruptcy Court seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). On November 19, 2018 (the “Plan Effective Date”), the Company and the Initial Debtors other than the Zonda Debtors (described below) (the “Debtors”) emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. The Company’s two subsidiaries involved in the arbitration with Samsung Heavy Industries Co. Ltd. (“SHI”) related to the Pacific Zonda , Pacific Drilling VIII Limited and Pacific Drilling Services, Inc. (together, the “Zonda Debtors”), filed a separate plan of reorganization that was confirmed by order of the Bankruptcy Court on January 30, 2019 and are not Debtors under the Plan.

During the bankruptcy proceedings, the Debtors operated as “debtors-in-possession” in accordance with applicable provisions of the Bankruptcy Code.

Upon emergence of the Company from bankruptcy on November 19, 2018 in accordance with the Plan:

·

The Company’s pre-petition 2013 Revolving Credit Facility and SSCF (both as defined in Note 8 to the consolidated financial statements included in our 2018 Annual Report), and post-petition debtor-in-possession financing were repaid in full;

·

Holders of the Company’s Term Loan B, 2017 Notes and 2020 Notes (each term as defined in Note 8 to the consolidated financial statements included in our 2018 Annual Report) received an aggregate of 24,416,442 common shares (or, approximately 32.6% of the outstanding shares) in exchange for their claims;

·

The Company issued an aggregate of 44,174,136 common shares (or, approximately 58.9% of the outstanding shares) to holders of Term Loan B, 2017 Notes and 2020 Notes who subscribed in the Company’s $460.0 million equity rights offering;

·

The Company issued 3,841,229 common shares (or, approximately 5.1% of the outstanding shares) to Quantum Pacific Gibraltar Limited (“QP”) in a $40.0 million private placement;

·

The Company issued 2,566,056 common shares (or, approximately 3.4% of the outstanding shares) to members of an ad hoc group of holders of the Term Loan B, 2017 Notes and 2020 Notes (the “Ad Hoc Group”) in payment of their fee for backstopping the equity rights offering;

·

The Company issued approximately 7.5 million common shares to Pacific Drilling Administrator Limited, a wholly owned subsidiary of the Company that serves as administrator of the Company’s 2018 Omnibus Stock Incentive Plan (the “2018 Stock Plan”), adopted by the board of directors, and which shares were reserved for issuance under the 2018 Stock Plan;

·

Existing holders of the Company’s common shares received no recovery and were diluted by the issuances of common shares under the Plan such that they held in the aggregate less than 0.003% of the Company’s common shares outstanding upon emergence from bankruptcy; and

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Table of Contents

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

 

·

The undisputed claims of other unsecured creditors such as clients, employees and vendors, will be paid in full in the ordinary course of business.

Prior to the issuance of the shares described above, the Company effected a 1-for-10,000 reverse stock split (the “Reverse Stock Split”).

As a result of the Reverse Stock Split and the issuances of common shares described above, the Company had issued and outstanding on the Plan Effective Date approximately 75.0 million common shares, and approximately 7.5 million shares were reserved for issuance pursuant to the 2018 Stock Plan.

 

In addition, pursuant to the Plan, on September 26, 2018 bankruptcy-remote subsidiaries of the Company issued, and on November 19, 2018 such subsidiaries merged with the Company and the Company assumed (the “Notes Assumption”):

·

$750.0 million in aggregate principal amount of 8.375% First Lien Notes due 2023, secured by first-priority liens on substantially all assets of the Debtors (the “First Lien Notes”); and

·

$273.6 million in aggregate principal amount of 11.0% / 12.0% Second Lien PIK Notes due 2024, secured by second-priority liens on substantially all assets of the Debtors (the “Second Lien PIK Notes”). Approximately $23.6 million aggregate principal amount was issued as a commitment fee to the Ad Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.

Concurrent with the Notes Assumption, all of the Company’s subsidiaries other than the Zonda Debtors, certain immaterial subsidiaries and Pacific International Drilling West Africa Limited (“PIDWAL,” a Nigerian limited liability company indirectly 49% owned by the Company) guaranteed on a senior secured basis the First Lien Notes and Second Lien PIK Notes. It is expected that the Zonda Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their separate plan of reorganization after the successful resolution of the arbitration proceeding involving the Pacific Zonda . If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors and the Zonda Debtors would not guarantee the First Lien Notes and Second Lien PIK Notes. See Note 13 for further discussion.

We have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our consolidated statements of operations. The components of reorganization items are as follows:

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

Three Months

 

 

Three Months

 

Ended March 31, 

 

 

Ended March 31, 

 

2019

 

 

2018

(in thousands)

 

 

 

 

 

 

Professional fees

$

1,003

 

 

$

12,032

Total reorganization items

$

1,003

 

 

$

12,032

 

 

Note 3 — Significant Accounting Policies

Basis of Presentation — Our accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and Article 10 of Regulation S-X of the SEC. Pursuant to such rules and regulations, these financial statements do not include all disclosures required by GAAP for complete financial statements. Our condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair

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Table of Contents

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

 

presentation of our financial position, results of operations and cash flows for the presented interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise identified. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any future period. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes of the Company for the year ended December 31, 2018.

Fresh Start Accounting — Upon the Company’s emergence from Chapter 11 bankruptcy, we adopted fresh start accounting (“Fresh Start Accounting”) in accordance with the provisions of Accounting Standards Codification (“ASC”) 852, Reorganizations , (“ASC 852”) issued by the Financial Accounting Standards Board (“FASB”), which resulted in the Company becoming a new entity for financial reporting purposes. As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements subsequent to November 19, 2018 are not comparable to its consolidated financial statements on and prior to November 19, 2018. References to “Successor” relate to the financial position and results of operations of the reorganized Company as of and subsequent to November 19, 2018. References to “Predecessor” relate to the financial position of the Company prior to, and results of operations through and including, November 19, 2018. The Company’s consolidated financial statements and related footnotes are presented with a “black line” division, which delineates the lack of comparability between amounts presented after November 19, 2018 and amounts presented on or prior to November 19, 2018.

 

Principles of Consolidation — Our condensed consolidated financial statements include the accounts of Pacific Drilling S.A., consolidated subsidiaries that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate all intercompany transactions and balances in consolidation.

We are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech Offshore Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech owns 51% of PIDWAL and we own 49% of PIDWAL. Pacific Bora Ltd. (“PBL”) and Pacific Scirocco Ltd. (“PSL”), which own the Pacific Bora and the Pacific Scirocco , respectively, are owned 49.9% by our wholly-owned subsidiary, Pacific Drilling Limited (“PDL”) and 50.1% by Pacific Drillship Nigeria Limited (“PDNL”). PDNL is owned 0.1% by PDL and 99.9% by PIDWAL. Derotech will not accrue the economic benefits of its interest in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Likewise, PIDWAL will not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. PIDWAL and PDNL are variable interest entities for which we are the primary beneficiary. Accordingly, we consolidate all interests of PIDWAL and PDNL in our condensed consolidated financial statements and no portion of their operating results is allocated to the noncontrolling interest.

Our condensed consolidated financial statements for the Successor exclude the Zonda Debtors, our wholly-owned subsidiaries, which filed a separate plan of reorganization.  We account for our investment in the Zonda Debtors using the equity method of accounting.

Related Party Transactions   We have determined that Abrams Capital Management, L.P., Avenue Capital Management II, LP., Strategic Value Partners, LLC and certain of their affiliates (the “Principal Shareholders”) meet the definition of related parties under GAAP.  As of March 31, 2019 and December 31, 2018, the Principal Shareholders held $30.1 million and $36.1 million of our Second Lien PIK Notes, respectively.

Recently Adopted Accounting Standards

Leases — Effective January 1, 2019, we adopted the accounting standards update for Leases (Topic 842) that requires lessees to recognize a right‑of‑use asset and lease liability for virtually all leases and updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and revenue recognition accounting standards. We applied the transition method that required us to recognize right‑of‑use assets and lease liabilities as of the date of our adoption with no adjustment to prior periods. We applied the package of

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Table of Contents

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

 

practical expedients that permitted us to carry forward historical lease classifications. For leases under which we are the lessee, we have recognized a right-of-use asset of $6.9 million, recorded in other assets, and a corresponding lease liability, recorded in accrued expenses and other long-term liabilities upon adoption. We have accounted for lease and non‑lease components of our operating leases as a single component. We have not recognized any right-of-use assets or lease liabilities for short-term leases. For our drilling contracts, which contain a lease component, we applied the practical expedient to recognize revenues based on the service component, which we determined to be predominant. Our adoption did not have and is not expected in the future to have a material effect on our condensed consolidated statements of financial position, operations or cash flows. See Note 11.

Recently Issued Accounting Standards

Measurement of Credit Losses on Financial Instruments — On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) , which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (i) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (ii) loan commitments and certain other off-balance sheet credit exposures, (iii) debt securities and other financial assets measured at fair value through other comprehensive income and (iv) beneficial interests in securitized financial assets. This update is effective for annual and interim periods beginning after January 1, 2020. We are currently evaluating the effect the standard may have on our consolidated financial statements and related disclosures.

Changes to Fair Value Disclosure Requirements — On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after January 1, 2020, with early adoption permitted. We are currently evaluating the effect the standard may have on our consolidated financial statement disclosures.

Note 4 — Property and Equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Drillships and related equipment

 

$

1,940,011

 

$

1,926,773

 

Other property and equipment

 

 

682

 

 

682

 

Property and equipment, cost

 

 

1,940,693

 

 

1,927,455

 

Accumulated depreciation

 

 

(39,153)

 

 

(12,283)

 

Property and equipment, net

 

$

1,901,540

 

$

1,915,172

 

 

 

Note 5 — Intangible Asset

Intangible asset consists of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2019

 

2018

 

 

(in thousands)

Client-related intangible asset

 

$

100,000

 

$

100,000

Accumulated amortization

 

 

(46,975)

 

 

(14,947)

Intangible asset, net

 

$

53,025

 

$

85,053

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During the three months ended March 31, 2019, amortization expense of intangible asset was $32.0 million based on an amortization period of 0.8 year. As of March 31, 2019, the remaining  2019 amortization expense is $53.0 million, which will be recognized on a straight-line basis through the end of the initial term of the related drilling contract in August 2019.

 

Note 6 — Receivable related to Zonda Arbitration

On January 25, 2013, we entered into a contract with Samsung Heavy Industries Co., Ltd. (“SHI”) for the construction of an eighth drillship, the  Pacific Zonda , which provided for a purchase price of approximately $517.5 million and an original delivery date of March 31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s failure to timely deliver the drillship in accordance with the contractual specifications. The carrying value of the newbuild at the date of rescission was $315.7 million, consisting of (i) advance payments in the aggregate of $181.1 million paid by us to SHI, (ii) purchased equipment, (iii) internally capitalized construction costs and (iv) capitalized interest.

On November 25, 2015, SHI formally commenced an arbitration proceeding against us in accordance with the Construction Contract. On November 30, 2015, we made demand under the third party refund guarantee accompanying the Construction Contract for the amount of our advance payments made under the Construction Contract, plus interest. Any payment under the refund guarantee is suspended until an award under the arbitration is obtained.  See Note 13.

On November 19, 2018, the Debtors emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. As of that date, we deconsolidated the Zonda Debtors, which filed a separate plan of reorganization and are not Debtors under the Plan. See Note 2.

As a result of adopting Fresh Start Accounting, we estimated the receivable related to the Zonda Arbitration at $204.7 million, included within receivable from unconsolidated subsidiaries on our condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018.  See Note 12.

 

Note 7 — Debt

Debt, net of debt premium (discount) consists of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

First Lien Notes

 

$

747,564

 

$

747,400

 

Second Lien PIK Notes

 

 

299,867

 

 

291,935

 

Total long-term debt

 

$

1,047,431

 

$

1,039,335

 

 

First Lien Notes and Second Lien PIK Notes

In connection with its emergence from the Chapter 11 proceedings, the Company assumed all obligations under the First Lien Notes and the Second Lien PIK Notes.

First Lien Notes

On September 26, 2018, Pacific Drilling First Lien Escrow Issuer Limited (the “First Lien Escrow Issuer”), a private company limited by shares incorporated in the British Virgin Islands and wholly owned subsidiary of the Company, entered into an indenture (the “First Lien Notes Indenture”) with Wilmington Trust, National Association, as trustee (the “Trustee”) and collateral agent, relating to the issuance by the First Lien Escrow Issuer of $750.0 million aggregate principal amount of 8.375% First Lien Notes due 2023 (the “First Lien Notes”).

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The First Lien Notes were sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and were offered and sold under Rule 144A of the Securities Act, and to non-U.S. persons in transactions outside the United States under Regulation S of the Securities Act. The First Lien Notes have not been, and will not be, registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.

Upon the emergence of the Company from the Chapter 11 proceedings on November 19, 2018, the First Lien Escrow Issuer merged into the Company and the Company assumed all obligations of the First Lien Escrow Issuer under the First Lien Notes Indenture.

The First Lien Notes accrue interest at a rate of 8.375% per annum, payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2019. The First Lien Notes will mature on October 1, 2023, unless earlier redeemed or repurchased.

The First Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of the Company’s subsidiaries other than the Zonda Debtors, certain immaterial subsidiaries and PIDWAL. It is expected that the Zonda Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their separate plan of reorganization after the successful resolution of the arbitration proceeding involving the Pacific Zonda. If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors and the Zonda Debtors would not guarantee the First Lien Notes and Second Lien PIK Notes. See Note 13 for further discussion.

The First Lien Notes are secured by first-priority liens on substantially all assets of the Company and the guarantors (other than certain excluded property), including (i) vessels, (ii) books and records, (iii) certain deposit accounts and the amounts contained therein, (iv) assignments of proceeds of hull and machinery and loss of hire insurance, (v) assignments of earnings from drilling contracts, and (vi) equity interests owned by the Company and the guarantors, in each case, subject to certain exceptions, including that such first-priority liens will be subject to payment priority in favor of future holders, if any, of certain superpriority first lien debt of up to $50.0 million.

The First Lien Notes Indenture contains covenants limiting the ability of the Company, and any restricted subsidiary to, among other things, (i) incur or guarantee additional indebtedness and issue preferred stock, (ii) pay dividends on or redeem or repurchase capital stock, make certain investments, make certain payments on or with respect to subordinated and junior debt (including making cash interest or principal payments on the Second Lien PIK Notes (as defined below)), (iii) create or incur certain liens, (iv) impose restrictions on the ability of restricted subsidiaries to pay dividends, (v) merge or consolidate with other entities, (vi) enter into certain transactions with affiliates, (vii) impair the security interests in the collateral for the First Lien Notes, and (viii) engage in certain lines of business. These covenants are subject to a number of important exceptions and qualifications and certain of them will be suspended with respect to the First Lien Notes in the event that the First Lien Notes obtain an investment grade rating.

The Company may be required to offer to purchase the First Lien Notes at 101.0% percent of the principal amount thereof, plus accrued and unpaid interest, upon the occurrence of a Change of Control (as defined in the First Lien Notes Indenture), and at 100.0% of the principal amount, plus accrued and unpaid interest, under certain other circumstances. In addition, the Company will be required to offer to purchase First Lien Notes at 100.0% of the principal amount thereof, plus accrued and unpaid interest, with any cash proceeds from a settlement or award in connection with the arbitration relating to the Pacific Zonda with such offer to be for an aggregate principal amount of First Lien Notes equal to the lesser of (x) 50.0% of such cash proceeds and (y) $75.0 million.

At any time prior to October 1, 2020, (i) the Company may redeem the First Lien Notes, in whole or in part, at a redemption price equal to 100.0% of the principal amount thereof, plus a “make-whole” premium, (ii) the Company may redeem up to 35.0% of the original principal amount of the First Lien Notes with proceeds from certain equity offerings at a redemption price equal to 108.375% of the principal amount thereof, and (iii) not more than once in any twelve-

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month period, the Company may redeem up to 10.0% of the original principal amount of the First Lien Notes at a redemption price equal to 103.0% of the principal amount thereof, in each case plus accrued and unpaid interest.

At any time on or after October 1, 2020, the Company may redeem the First Lien Notes, in whole or in part, at the following redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest, during the twelve-month period beginning on October 1 of the years indicated: 2020 – 104.188%; 2021 – 102.094%; 2022 and thereafter – 100.000%.

The First Lien Notes Indenture contains customary events of default, including, among other things, (i) failure to make required payments; (ii) failure to comply with certain agreements or covenants; (iii) failure to pay certain other indebtedness; (iv) certain events of bankruptcy and insolvency; and (v) failure to pay certain judgments. An event of default under the First Lien Notes Indenture will allow either the Trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding First Lien Notes to accelerate, or in certain cases will automatically cause the acceleration of, the amounts due under the First Lien Notes.

Intercreditor Agreement

The relationship between holders of First Lien Notes (and any future first lien debt), on the one hand, and Second Lien PIK Notes (and any future junior lien debt), on the other hand, is governed by an intercreditor agreement. Pursuant to the intercreditor agreement, the liens securing first lien debt are effectively senior in priority to the liens securing junior lien debt. If the Company incurs any future first lien debt, the relationship between holders of such debt and First Lien Notes will be governed by a collateral agency agreement. Such agreements will allow for payment priority in favor of holders of up to $50.0 million of future superpriority first lien debt.

Second Lien PIK Notes  

On September 26, 2018, Pacific Drilling Second Lien Escrow Issuer Limited (the “Second Lien Escrow Issuer”), a private company limited by shares incorporated in the British Virgin Islands and wholly owned subsidiary of the Company, entered into an indenture (the “Second Lien PIK Notes Indenture”) with the Trustee, as trustee and junior lien collateral agent, relating to the issuance by the Second Lien Escrow Issuer of approximately $273.6 million aggregate principal amount of 11.0% / 12.0% Second Lien PIK Notes due 2024 (the “Second Lien PIK Notes”), of which (i) $250.0 million aggregate principal amount was issued pursuant to the Second Lien PIK Notes Offering (as defined below), and (ii) approximately $23.6 million aggregate principal amount was issued as a commitment fee to the Ad Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.

The Second Lien PIK Notes were sold in a private transaction exempt from the registration requirements of the Securities Act and were offered and sold under Rule 144A of the Securities Act, and to non-U.S. persons in transactions outside the United States under Regulation S of the Securities Act (the “Second Lien PIK Notes Offering”). The Second Lien PIK Notes have not been, and will not be, registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws.

Upon the emergence of the Company from the Chapter 11 proceedings on November 19, 2018, the Second Lien Escrow Issuer merged into the Company and the Company assumed all obligations of the Second Lien Escrow Issuer under the Second Lien PIK Notes Indenture.

For each interest period, interest is payable, at the option of the Company, (i) entirely in cash (“Cash Interest”), (ii) entirely through the issuance of additional Second Lien PIK Notes having the same terms and conditions as the Second Lien PIK Notes issued in the Second Lien PIK Notes Offering in a principal amount equal to the amount of interest then due and payable or by increasing the then outstanding aggregate principal amount of Second Lien PIK Notes (“PIK Interest”) or (iii) 50% as Cash Interest and 50% as PIK Interest. If the Company elects to pay interest for an interest period entirely in the form of Cash Interest, interest will accrue at a rate of 11.0% per annum for such interest period. If

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the Company elects to pay interest for an interest period entirely in the form of PIK Interest, interest will accrue at a rate of 12.0% per annum for such interest period. If the Company elects to pay 50% in Cash Interest and 50% in PIK Interest for an interest period, (i) interest in respect of the Cash Interest portion will accrue at 11.0% and (ii) interest in respect of the PIK Interest portion will accrue at 12.0% for such interest period.

Interest on the Second Lien PIK Notes is payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2019. The Second Lien PIK Notes will mature on April 1, 2024, unless earlier redeemed or repurchased.

The Second Lien PIK Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by all of the Company’s subsidiaries that guarantee the Company’s First Lien Notes and are secured by second-priority liens on all of the assets of the Company and the guarantors that also serve as collateral for the Company’s First Lien Notes.

The Second Lien PIK Notes Indenture contains covenants limiting the ability of the Company, and any restricted subsidiary to, among other things, (i) incur or guarantee additional indebtedness and issue preferred stock, (ii) pay dividends on or redeem or repurchase capital stock, make certain investments, make certain payments on or with respect to subordinated and junior debt, (iii) create or incur certain liens, (iv) impose restrictions on the ability of restricted subsidiaries to pay dividends, (v) merge or consolidate with other entities, (vi) enter into certain transactions with affiliates, (vii) impair the security interests in the collateral for the Second Lien PIK Notes, and (viii) engage in certain lines of business. These covenants are subject to a number of important exceptions and qualifications and certain of them will be suspended with respect to the Second Lien PIK Notes in the event that the Second Lien PIK Notes obtain an investment grade rating.

The Company may be required to offer to purchase the Second Lien PIK Notes at 101.0% percent of the principal amount thereof, plus accrued and unpaid interest, upon the occurrence of a Change of Control (as defined in the Second Lien PIK Notes Indenture) (a “Change of Control Offer”), and at 100.0% of the principal amount, plus accrued and unpaid interest, under certain other circumstances. In addition, the Company will be required to offer to purchase Second Lien PIK Notes at 100.0% of the principal amount thereof, plus accrued and unpaid interest, with the cash proceeds, if any, from a settlement or award in connection with the arbitration with SHI related to the Pacific Zonda , with such offer to be for an aggregate principal amount of the Second Lien PIK Notes equal to the lesser of (x) 50.0% of such cash proceeds and (y) $75.0 million, provided, that if the Company is required to offer to purchase the First Lien Notes with such cash proceeds, the Company shall only be required to offer to purchase the Second Lien PIK Notes with the portion thereof that has been declined by the holders of First Lien Notes.

 

At any time prior to April 1, 2020, (i) the Company may redeem the Second Lien PIK Notes, in whole or in part, at a redemption price equal to 100.0% of the principal amount thereof, plus a “make-whole” premium, and (ii) the Company may redeem up to 35.0% of the original principal amount of the Second Lien PIK Notes with the proceeds from certain equity offerings at a redemption price equal to 112.0%, in each case plus accrued and unpaid interest.

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At any time on or after April 1, 2020, the Company may redeem the Second Lien PIK Notes, in whole or in part, at the following redemption prices (expressed as a percentage of principal amount), plus any accrued and unpaid interest, during the six-month period beginning on the dates indicated below:

 

 

 

Date

 

Price

April 1, 2020

 

112.0%

October 1, 2020

 

109.0%

April 1, 2021

 

106.0%

October 1, 2021

 

103.0%

April 1, 2022 and thereafter

 

100.0%

At any time after a Change of Control occurs, the Company may redeem all, but not less than all, of the Second Lien PIK Notes at the following redemption prices (expressed as a percentage of principal amount), plus any accrued and unpaid interest, during the six-month period beginning on the dates indicated below:

 

 

 

Date

 

Price

April 1, 2020

 

106.0%

October 1, 2020

 

109.0%

April 1, 2021

 

106.0%

October 1, 2021

 

103.0%

April 1, 2022 and thereafter

 

100.0%

If the Company exercises this Change of Control redemption right, it may elect not to make the Change of Control Offer described above.

The Second Lien PIK Notes Indenture contains customary events of default, including, among other things, (i) failure to make required payments; (ii) failure to comply with certain agreements or covenants; (iii) failure to pay certain other indebtedness; (iv) certain events of bankruptcy and insolvency; and (v) failure to pay certain judgments. An event of default under the Second Lien PIK Notes Indenture will allow either the Trustee or the holders of at least 25.0% in aggregate principal amount of the then-outstanding Second Lien PIK Notes to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the Second Lien PIK Notes.

Pre-Petition Secured Debt

On November 12, 2017, the Debtors filed the Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code. Prior to the Petition Date, the Company had outstanding its 2017 Notes, Term Loan B, 2013 Revolving Credit Facility, SSCF and 2020 Notes (collectively, the “Pre-Petition Secured Debt”). For a description of the Pre-Petition Secured Debt, see our 2018 Annual Report.

The filing of the Bankruptcy Petitions constituted an event of default with respect to the Pre-Petition Secured Debt. As a result, the corresponding Pre-Petition Debt became immediately due and payable and any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 proceedings.

On November 19 , 2018, the Company emerged from the Chapter 11 proceedings, and repaid in full the 2013 Revolving Credit Facility and SSCF, and issued common shares in satisfaction of the claims under the 2017 Notes, Term Loan B and 2020 Notes. As a result, the Pre-Petition Secured Debt is no longer outstanding.

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Note 8 — Earnings per Share

The following reflects the income and the share data used in the basic and diluted earnings per share (“EPS”) computations:

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Three Months

 

 

Three Months

 

 

Ended March 31, 

 

 

Ended March 31, 

 

    

2019

    

    

2018

(in thousands, except per share information)

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

Net loss, basic and diluted

 

$

(83,979)

 

 

$

(96,051)

Denominator:

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding, basic

 

 

75,031

 

 

 

21,339

Weighted-average number of common shares outstanding, diluted

 

 

75,031

 

 

 

21,339

Loss per share:

 

 

 

 

 

 

 

Basic

 

$

(1.12)

 

 

$

(4.50)

Diluted

 

$

(1.12)

 

 

$

(4.50)

 

The following table presents the share effects of share-based compensation awards that were excluded from our computations of diluted EPS, as their effect would have been anti-dilutive for the periods presented:

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Three Months

 

 

Three Months

 

 

Ended March 31, 

 

 

Ended March 31, 

 

    

2019

    

    

2018

(in thousands)

 

 

 

 

 

Share-based compensation awards

 

 822

 

 

308

 

 

Note 9 — Income Taxes

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. As of March 31, 2019 and December 31, 2018, we had $43.0 million and $42.5 million, respectively, of unrecognized tax benefits which were included in other long-term liabilities on our condensed consolidated balance sheets. To the extent we have income tax receivable balances available to utilize against amounts payable for unrecognized tax benefits, we have presented such receivable balances as a reduction to other long-term liabilities on our condensed consolidated balance sheets. The entire balance of unrecognized tax benefits as of March 31, 2019 would favorably impact our effective tax rate if recognized. As of March  31, 2019 and December 31, 2018, we have no accrued interest or penalties related to uncertain tax positions, as such payments would not be required by law.

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Note 10 — Revenue from Contracts with Clients

Contract Assets and Liabilities

The following table provides information about trade receivables, contract assets and contract liabilities:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Trade receivables, net

 

$

46,421

 

$

40,144

 

Current contract liabilities (deferred revenue)

 

 

1,443

 

 

 —

 

Significant changes in contract assets and contract liabilities for the three months ended March  31, 2019 are as follows:

 

 

 

 

 

 

 

 

 

Contract Assets

 

Contract Liabilities

 

 

(in thousands)

Balance at December 31, 2018

 

$

 —

 

$

 —

Decrease due to amortization of deferred revenue

 

 

 —

 

 

570

Increase due to billings related to client capital upgrades

 

 

 —

 

 

(2,013)

Balance at March 31, 2019

 

$

 —

 

$

(1,443)

 

Future Amortization of Contract Liabilities

The following table reflects revenue expected to be recognized in the future related to unsatisfied performance obligations as of March  31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

nine months

 

For the years ending December 31, 

 

 

2019

 

2020

 

2021

 

2022 and thereafter

 

Total

 

 

(in thousands)

Amortization of contract liabilities

 

$

1,096

 

$

347

 

$

 —

 

$

 —

 

$

1,443

The expected timing for recognition of such revenue is based on the estimated start date and duration of each respective contract as of March  31, 2019. The actual timing of recognition of such amounts may vary due to factors outside of our control. We have applied the optional exemption in Topic 606 and have not disclosed the variable consideration related to our estimated future dayrate revenue.

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Note  11  — Leases

Our leasing activities primarily consist of operating leases for corporate offices, regional shorebase offices and office equipment. The components and other information related to leases are as follows:

 

 

 

 

 

 

Three Months

 

 

Ended March 31, 

 

 

2019

 

 

 

(in thousands)

Lease Expense

 

 

 

Operating lease cost

 

$

598

 

 

 

 

Supplemental Cash Flows Information

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

 

360

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

 

6,935

 

 

 

 

Weighted Average Remaining Lease Term (in years)

 

 

 

Operating leases

 

 

5.5

 

 

 

 

Weighted Average Discount Rate

 

 

 

Operating leases

 

 

8.1%

 

Future minimum lease payments for our leases as of March 31, 2019 and a reconciliation to lease liabilities recorded on our condensed consolidated balance sheet are as follows:

 

 

 

 

 

 

    

Operating Leases

Years Ending December 31, 

    

(in thousands)

2019 (excluding three months ended March 31, 2019)

 

$

1,086

2020

 

 

1,472

2021

 

 

1,499

2022

 

 

1,525

2023

 

 

1,552

Thereafter

 

 

1,179

Total future minimum lease payments

 

 

8,313

Less imputed interest

 

 

(1,601)

Total

 

$

6,712

 

 

 

 

Reported as of March 31, 2019

 

 

 

Accrued expenses

 

$

953

Other long-term liabilities

 

 

5,759

Total lease liabilities

 

$

6,712

 

Note 12 — Fair Value Measurements

We estimated fair value by using appropriate valuation methodologies and information available to management as of March  31, 2019 and December 31, 2018. Considerable judgment is required in developing these estimates, and accordingly, estimated values may differ from actual results.

The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable, other receivable, accounts payable and accrued expenses approximated their carrying value due to their short-term nature. The following

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table presents the carrying value and estimated fair value of our cash and cash equivalents and other financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

337,173

 

$

337,173

 

$

367,577

 

$

367,577

 

First Lien Notes

 

 

747,564

 

 

753,750

 

 

747,400

 

 

714,953

 

Second Lien PIK Notes

 

 

299,867

 

 

297,023

 

 

291,935

 

 

285,548

 

Receivable from unconsolidated subsidiaries

 

 

204,790

 

 

207,990

 

 

204,790

 

 

205,790

 

 

We estimate the fair value of our cash equivalents using significant other observable inputs, representative of a Level 2 fair value measurement, including the net asset values of the investments. As of March  31, 2019 and December 31, 2018, the aggregate carrying amount of our cash equivalents was $295.8 million and $331.3 million, respectively. We estimate the fair values of our debt using quoted market prices to the extent available and significant other observable inputs, which represent Level 2 fair value measurements.

We applied a probability weighted approach to estimate the value of assets associated with the Zonda Arbitration, which was presented within receivable from unconsolidated subsidiaries on our consolidated balance sheets. The analysis included estimating probabilities of success for the various outcomes and expected cash flows associated with each outcome. The probability weighted cash flows were discounted to the balance sheet date using market data. The analysis utilized certain unobservable inputs that require significant judgment for which there is little or no market data, which represent Level 3 fair value measurements. These included, but were not limited to, probability and timing of successfully recovering the advance payments and purchased equipment.

Note 13 — Commitments and Contingencies

Commitments  — As of March 31, 2019, we had commitments for capital expenditures related to rig enhancements of $10.1  million.

Customs bonds  — As of March 31, 2019, we were contingently liable under certain customs bonds totaling approximately $23.3 million issued as security in the normal course of our business.

Contingencies — It is to be expected that we will routinely be involved in litigation and disputes arising in the ordinary course of our business.

On the Petition Date, Pacific Drilling S.A. and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As a result of the Chapter 11 proceedings, attempts to prosecute, collect, secure or enforce remedies with respect to pre-petition claims against us were subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, including litigation relating to us and our subsidiaries that were Debtors in the Chapter 11 proceedings. On November 19, 2018, the Debtors emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. See Note 2.

 

In January 2013, our subsidiary Pacific Drilling VIII Limited (“PDVIII”) entered into, and our subsidiary Pacific Drilling Services, Inc. (“PDSI”) guaranteed, a contract with SHI for the construction of the Pacific Zonda, with a purchase price of approximately $517.5 million and original delivery date of March 31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s failure to timely deliver the drillship in accordance with the contractual specifications. SHI rejected our rescission, and on November 25, 2015, formally commenced an arbitration proceeding against us in London under the Arbitration Act 1996 before a tribunal of three arbitrators (as specified in the Construction Contract) (the “Tribunal”). SHI claims that we

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Table of Contents

PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

 

wrongfully rejected their tendered delivery of the drillship and seeks the final installment of the purchase price under the Construction Contract. On November 30, 2015, we made demand under the third-party refund guarantee accompanying the Construction Contract for the amount of our advance payments made under the Construction Contract of approximately $181.1 million, plus interest. Any payment under the refund guarantee is suspended until an award under the arbitration is obtained. In addition to seeking repayment of our advance payments made under the Construction Contract, we have made a counterclaim for the return of our purchased equipment, or the value of such equipment, and damages for our wasted expenditures. We own $75.0 million in purchased equipment for the Pacific Zonda, a majority of which remains on board the Pacific Zonda. As part of our “first day” relief in the Chapter 11 proceedings, the Bankruptcy Court granted us a modification of the automatic stay provisions of the Bankruptcy Code to allow us to proceed with this arbitration.

 

An evidentiary hearing was held in London before the Tribunal from February 5 through March 2, 2018. Written closing submissions and short replies to such submissions were filed with the Tribunal in May 2018. Oral closing submissions were heard by the Tribunal in early August 2018. We expect the Tribunal to render its award within the next several months.

 

SHI has asserted claims against PDVIII and PDSI, secured by the Pacific Zonda , for approximately $387.4 million, for the remaining unpaid purchase price, interest and costs. The Zonda Debtors filed a separate plan of reorganization which was confirmed by order of the Bankruptcy Court on January 30, 2019 and are not Debtors under the Plan. On the date the Zonda Debtors’ plan was confirmed, PDVIII and PDSI had $4.6 million in cash and no other material assets after accounting for post-petition administrative expenses (other than the value of their claims against SHI) for SHI to recover against on account of its claims. It is expected that the Zonda Debtors will emerge from bankruptcy pursuant to their separate plan of reorganization after the successful resolution of the arbitration proceeding. If the Zonda Debtors are unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors.

 

Based on our assessment of the facts and circumstances of the rescission, we believe the recovery of the advance payments, accrued interest and the purchased equipment on board the Pacific Zonda is probable. Therefore, we have recognized the related assets on our condensed consolidated balance sheets at March 31, 2019 and December 31, 2018. See Note 6.

 

We do not believe that the ultimate outcome resulting from this arbitration will have a material adverse effect on our financial position, results of operations or cash flows.

 

Note 14 — Supplemental Cash Flow and Financial Information

During the three months ended March  31, 2019 and 2018, we paid $0 and $15.2 million of interest, respectively. During the three months ended March  31, 2019 and 2018, we paid $2.0 million and $0.7 million of income taxes, respectively.

During the three months ended March  31, 2019 and 2018, we paid $3.8 million and $7.3 million in reorganization items, respectively.

Within our condensed consolidated statements of cash flows, capital expenditures represent expenditures for which cash payments were made during the period. These amounts exclude accrued capital expenditures, which are capital expenditures that were accrued but unpaid. During the three months ended March  31, 2019 and 2018, changes in accrued capital expenditures were $(4.4) million and $(0.6) million, respectively.

 

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PACIFIC DRILLING S.A. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

 

Note 15 — Summarized Financial Information of Zonda Debtors

The following presents summarized financial information of the Zonda Debtors, which were deconsolidated as of November 19, 2018 and accounted for under the equity method.

 

Pacific Drilling VIII Limited and Pacific Drilling Services, Inc.

Summarized Financial Information

(in thousands)

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,  2019

 

 

 

 

Intercompany revenues

 

$

712

Costs and expenses

 

 

(1,152)

Operating loss

 

 

(440)

Net loss

 

 

(1,052)

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

Current assets

 

$

5,123

Noncurrent assets

 

 

213,135

Current liabilities

 

 

1,450

Noncurrent liabilities (a)

 

 

332,216

 

(a) Noncurrent liabilities primarily consist of pre-petition intercompany payable.

 

 

 

 

 

 

 

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Item 2 — Operating and Financial Review and Prospects

Overview

We are an international offshore drilling contractor providing offshore drilling services to the oil and gas industry through the use of high-specification floating rigs. Our primary business is to contract our fleet of rigs to drill wells for our clients. We believe we own and operate the only deepwater fleet comprised solely of sixth and seventh generation high-specification drillships, and that our current fleet of seven drillships offers premium technical capabilities to our clients. The term “high-specification,” as used in the floating rig drilling industry to denote a particular segment of the market, can vary and continues to evolve with technological improvements. We generally consider high-specification requirements to include non-harsh environment drillships delivered in or after 2005 and capable of drilling in water depths of 10,000 feet or more.

Our Fleet

The following table sets forth certain information regarding our fleet as of May 6, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water Depth

 

Drilling Depth

 

Hook Load

 

# of Blowout

 

Dual Load

Rig Name

    

Delivered

    

(in feet)

    

(in feet)

    

(tons)

    

Preventers

    

Path(a)

Pacific Bora

 

2010

 

10,000

 

37,500

 

1,000

 

 2

 

No

Pacific Mistral

 

2011

 

12,000

 

37,500

 

1,000

 

 1

 

No

Pacific Scirocco

 

2011

 

12,000

 

40,000

 

1,000

 

 1

 

Yes

Pacific Santa Ana

 

2011

 

12,000

 

40,000

 

1,000

 

 1

 

Yes

Pacific Khamsin

 

2013

 

12,000

 

40,000

 

1,250

 

 2

 

Yes

Pacific Sharav

 

2014

 

12,000

 

40,000

 

1,250

 

 2

 

Yes

Pacific Meltem

 

2014

 

12,000

 

40,000

 

1,250

 

 2

 

Yes


(a)

All of our drillships have a dual derrick drilling system and five of our seven drillships are dual load path capable. The dual load path capable drillships can lower pipe and equipment to the seafloor from both drilling stations under the derrick, reducing well construction time by allowing operations to be conducted concurrently, rather than consecutively in series as the process has, due to equipment limitations, traditionally required. The remaining two drillships contain a dual derrick drilling system, but only use the secondary derrick to prepare pipe and equipment for the primary drilling process.

 

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Fleet Status

The status of our fleet as of May  6, 2019 and certain historical fleet information follows:

·

The Pacific Sharav is operating under a five-year contract with a subsidiary of Chevron through August 27, 2019. In February 2019, the Pacific Sharav entered into an amendment to extend the contract with Chevron to operate in the U.S. Gulf of Mexico beyond its initial five-year term for one firm well and three additional option wells.

·

The Pacific Bora completed a five-year contract with a subsidiary of Chevron in September 2016.  From February 9, 2017 to May 16, 2017, the Pacific Bora operated under a contract with Folawiyo AJE Services Limited in Nigeria. From August 1, 2017 to October 3, 2017, and from November 30, 2017 to February 5, 2018, the Pacific Bora operated under a contract with Erin Energy Corporation in Nigeria. On November 30, 2018, the Pacific Bora commenced operations with Eni to operate in Nigeria for one firm well with two option wells (each well estimated at approximately 60 days of work). In February 2019, the client exercised the first option.

·

The Pacific Santa Ana commenced a contract with a subsidiary of Chevron in May 2012 that was completed in January 2017. From December 20, 2017 to May 7, 2018, the Pacific Santa Ana operated in Mauritania under a contract with Petronas to perform integrated services under Phase I of a two-phased plug and abandonment project. Petronas exercised its option to contract the Pacific Santa Ana for Phase II of the plug and abandonment project in Mauritania, which is expected to commence in the third quarter of 2019 with an estimated 360 days of work. The Pacific Santa Ana is currently operating for Total in Senegal for one firm well. The drilling contract with Total provides also for two option wells in Mauritania.

·

The Pacific Khamsin  completed a two-year contract with a subsidiary of Chevron in Nigeria in December 2015, and is currently ramping up for a contract with Equinor in the U.S. Gulf of Mexico starting in November 2019 for one firm well and three option wells.

·

The Pacific Meltem is currently idle in Las Palmas while actively seeking a contract.

·

The Pacific Scirocco operated under a contract with a subsidiary of Total from December 2011 to December 2016. From May 21, 2017 to September 15, 2017, the Pacific Scirocco operated under a contract with Hyperdynamics Corporation in the Republic of Guinea. The rig is currently idle in Las Palmas while actively seeking a contract.

·

The Pacific Mistral completed a three-year contract with Petroleo Brasiliero S.A. in Brazil in February 2015. The Pacific Mistral is currently idle in Las Palmas while actively seeking a contract.

 

From time to time, we are awarded letters of intent or receive letters of award for our drillships. Certain of those letters remain subject to negotiation and execution of definitive contracts and other customary conditions. No assurance can be given as to the terms of any such arrangement, such as the applicable duration or dayrate, until a definitive contract is entered into by the parties, if we are able to finalize a contract at all.

 

 

General Industry Trends and Outlook

Historically, operating results in the offshore contract drilling industry have been cyclical and directly related to the demand for and the available supply of capable drilling rigs, which are influenced by various factors. Brent crude prices declined from highs above $100 per barrel in mid-2014 to lows below $40 per barrel in early 2016. Prices generally fluctuated between $50 and $70 per barrel for the three years ended 2018. During 2019, prices have generally risen, closing at $71.24 per barrel on May 6, 2019. Although dayrates and utilization for high-specification drillships have in the past been less sensitive to short-term oil price movements than those of older or less capable drilling rigs, the sustained decline in oil prices from 2014 levels rendered many deepwater projects less attractive to our clients and significantly impacted the number of projects available for high-specification drillships.  However, over the period from 2015 to today, our clients have managed to reduce their total well construction costs, thereby allowing them economic success at lower oil prices and making deepwater projects more attractive.

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Drilling Rig Supply

Across the industry, there has been one order placed since April 2014 to build an additional high-specification drillship, and within the last year, there have been several delays in delivery dates for new drillships. We estimate that there are approximately 13 high-specification drillships in late stages of construction still to be delivered, with only one having a firm contract announced.

Additionally, as a result of significantly reduced contracting activity, a significant number of floating rigs have been removed from the actively marketed fleet through cold stacking or scrapping since early 2014. This trend, along with additional delays in delivery dates of existing orders for high-specification floating rigs, could continue as the offshore drilling market remains near a cyclical low. Despite these positive trends, the excess supply of high-specification floating rigs is expected to continue in 2019. Although we have visibility into the maximum number of high-specification floating rigs that could be available, we cannot accurately predict how many of those rigs will be actively marketed or how many of those rigs may be temporarily or permanently removed from the market.

Drilling Rig Demand

Demand for our drillships is a function of the worldwide levels of deepwater exploration and development spending by oil and gas companies, which has decreased or been delayed significantly as a result of the sustained weakness in oil prices. The type of projects that modern drillships undertake are generally located in deeper water, in more remote locations, and can be more capital intensive or require more time to first oil than competing alternatives. The drilling programs of oil and gas companies are also affected by the global economic and political climate, access to quality drilling prospects, exploration success, perceived future availability and lead time requirements for drilling equipment, advances in drilling technology, and emphasis on deepwater and high-specification exploration and production versus other areas.

Overall, the first quarter of 2019 saw an improving pace for high-specification floating rig contracting activity with about 7 rig years contracted, compared to 2 rig years in the first quarter of 2018. We expect contracting activity to continue to improve; however, no assurances can be given as to the scope, pace or duration of any recovery.

Supply and Demand Balance

Since the start of the market downturn in 2014, capital expenditure budgets have significantly declined for many exploration and production companies, although we have recently seen some increases. We estimate that through the end of 2019, a number of high-specification floating rigs will be available to commence operations. Additionally, several older, lower-specification drillships and mid-water semisubmersibles have recently completed contracts without follow-on contracts. The imbalance of supply and demand has resulted in significantly lower dayrates. While recent scrapping and cold stacking of floating assets have lowered the total rig supply, supply of deepwater drilling rigs continues to exceed demand. We believe that, if the recent improvement in oil prices is sustained, reduction in rig supply continues and breakeven costs for deepwater projects remain competitive, utilization of high-specification floating rigs will improve over the next few years.

For more information on this and other risks to our business and our industry, please read Item 3.D., “Risk Factors” in our 2018 Annual Report.

Contract Backlog

Our contract backlog includes firm commitments only, which are represented by signed drilling contracts. As of May 6, 2019 our contract backlog was approximately $228.2 million and was attributable to revenues we expect to generate on the Pacific Sharav , the Pacific Santa Ana, the Pacific Khamsin and the Pacific Bora under the drilling contracts with Chevron, Total/Petronas, Equinor and Eni, respectively. We calculate our contract backlog by multiplying the contractual dayrate by the number of days committed under the contracts (excluding options to extend), assuming full utilization, and also including mobilization fees, upgrade reimbursements and other revenue sources, such as the standby

24


 

rate during upgrades, as stipulated in the applicable contracts. For a well-by-well contract, we calculate the contract backlog by estimating the expected number of remaining days to drill the firm wells committed.

The actual amounts of revenues earned and the actual periods during which revenues are earned may differ from our contract backlog and periods shown in the table below due to various factors, including unplanned downtime and maintenance projects and other factors. Our contracts generally provide for termination at the election of the client with an “early termination payment” to be paid to us if a contract is terminated prior to the expiration of the fixed term. However, under certain limited circumstances, such as destruction of a drilling rig or sustained unacceptable performance by us, an early termination payment is not required to be paid. Accordingly, the actual amount of revenues earned may be substantially lower than the backlog reported.

The following table sets forth certain information regarding our fleet as of May 6,  2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contracted

 

 

 

Contract

 

 

Rig

    

Location

    

Client

    

Commencement

    

Expected Contract Duration

Pacific Sharav

 

U.S. Gulf of Mexico

 

Chevron

 

August 2014